Russia to help large borrowers as S&P mulls junk rating

MOSCOW — Russia's central bank offered on Wednesday to help leading exporters refinance foreign debts next year, expected to be one of the toughest of President Vladimir Putin's 15-year rule for the economy due to Western sanctions and a plunge in oil prices.

The bank said it would lend dollars and euros to major companies that were willing to put up their foreign borrowings as collateral.

The move means the state will in effect take on credit risk for the companies, whose foreign debt obligations have shot up in ruble terms because of the currency's sharp slide this year.

Even before the move, Standard & Poor's (S&P) ratings agency put Russia's sovereign credit outlook on "credit watch negative", meaning it could be downgraded to junk as soon as January due to a "rapid deterioration of Russia's monetary flexibility".

S&P, Moody's and Fitch all now rate Russia one notch above junk. The finance ministry said it was holding talks with ratings agencies to explain the situation in the economy.

The authorities have taken several steps in recent weeks to arrest the ruble's slide and avoid a spike in inflation after years of stability, developments that could threaten Putin's popularity.

They include a sharp interest rate hike, curbs on grain exports and informal capital controls.

While Russia's sovereign foreign debts are minimal, state and private companies and banks have accumulated $600 billion in foreign debts, of which around $100 billion are due next year.

The ability to repay the loans or roll them over has been severely reduced this year by Western sanctions, imposed on Russia for its actions in Ukraine, which effectively shut its companies and banks out of Western debt markets.

But the economic crisis in Russia's heavily oil-dependent economy goes wider. Moody's ratings agency said on Tuesday that it expected Russia's gross domestic product (GDP) to contract by 5.5 per cent in 2015 and 3 per cent in 2016, under the effect of the plunge in oil prices and the ruble's slide.

"These developments will likely lead to a severe deterioration in the operating environment for Russian corporates, namely higher inflation, unemployment and debt-servicing costs as well as lower domestic demand, resulting in a deeper and more protracted decline in domestic economic activity than previously anticipated," Moody's said.

Russia has around $414 billion in foreign exchange and gold reserves, down from around $510 billion at the start of the year, after spending heavily to prop up the ruble as the price of oil, Russia's main export earner, almost halved from this year's peaks in June.

The ruble, which dipped last week to 80 to the dollar, has since recovered to around 55, still about 40 per cent down since the start of the year.

The central bank said Wednesday's move was aimed at "helping to refinance foreign credits by Russian exporters in foreign currencies maturing in the near future at a time of their restricted abilities to access international capital markets".

It said these lending operations would also help to bring the ruble exchange rate into line with fundamentals and reduce volatility. Loans are to be provided for up to one year at auctions, at a minimal rate of Libor plus 0.75 per cent.

Oleg Kouzmin, an economist at Renaissance Capital, said the amount allocated was small enough not to undermine the central bank's ability to support the ruble.

State-controlled VTB Bank said it would use the facility if needed but that "currently, there is no such need".

The central bank and the finance ministry have also promised to help banks with extra ruble liquidity and regulatory measures.

The lower house of parliament rushed to pass a draft law on Friday that will give the banking sector a capital boost of up to one trillion rubles ($18.33 billion).

Dmitry Polevoy, chief economist for Russia at ING, said the central bank had taken too long to act: "The problems with foreign exchange funding emerged in early September and have only been getting worse since then. The Central Bank of Russia has mostly been putting out fires rather than preventing them."

Separately, an influential farm lobby group said on Wednesday that Russia's grain exports have stopped due to curbs brought in to protect domestic supply, putting big deals at risk.

Russia's main wheat buyers are Turkey, Iran and, very vulnerable to supply disruption, Egypt.

Moscow imposed informal grain export controls with tougher quality monitoring and limits on railroad loadings earlier this month, as it tackles a financial crisis linked to plunging oil and Western sanctions.

"Since last Thursday not a single vessel, which had been due to sail under contracts, has left," Arkady Zlochevsky, the head of Russia's Grain Union, the farmers lobby group, said.

Officials also plan to impose duty on grain exports.  Zlochevsky said its exact level was an unimportant detail, as he was sure it would be prohibitive.

"All loadings are suspended, there is only a need to legally formalise it," Zlochevsky added. Global wheat futures rose after his comments.

A spokeswoman for Russian Deputy Prime Minister Arkady Dvorkovich, who had promised to prepare the proposal for an export duty, was not available for comment.

Repeated restrictions

Zlochevsky criticised the decision to impose restrictions for the third time in six years.

Russia imposed a duty on wheat exports in 2008 and an official ban in 2010 when a drought hit its crop.

The 2010 ban was partially responsible for triggering social unrest and a revolution in Egypt as more than 500,000 tonnes were not supplied and global prices rose damaging Egypt's state bread subsidy programme, Zlochevsky said.

About 3 million tonnes of grain due for export until the end of January were now stuck, Zlochevsky indicated.

As a result, Russia may fail to supply wheat to Egypt's General Authority for Supply Commodities (GASC), the state buyer of the world's largest wheat importer, in January, he said. "Of course, it includes supplies to GASC. How would we be able to supply it?" 

He remarked that shipments would only be possible if and when the government makes an exception for Egypt.

Mamdouh Abdel Fattah, GASC's vice chairman, told Reuters on Wednesday that trading companies were obliged to abide by their contracts to ship Russian wheat to Egypt.

GASC purchased 180,000 tonnes of wheat for January shipment, of which 120,000 tonnes for January 11-20 shipment purchased on December 11 and 60,000 tonnes for January 21-31, bought on Saturday.

"If there will be no Russian wheat available for Egypt by a government decision then the firms can proceed to negotiate with GASC to change the origin in the contract," a Cairo-based trading source said.

Russia, expected to be the world's fourth-largest exporter this year, had been exporting record volumes from a large grain crop of 105 million tonnes.

"What's clear is that they won't sell anything anymore," a European trader said. "Now the market wants to have more details on what the government will do concretely."