Author`s name Alex Naumov

Russian companies may default because of huge corporate debt

In 2008, Russian companies and banks are expected to borrow $125 billion in foreign loans. The amount of borrowings equals half of the accumulated debt obligations, which already totals one quarter of Russia’ GDP. Experts warn that the ratio may cause Russian companies to default.

Russian companies will repay $88 billion in external debts in 2008. The debt repayment amount will exceed Russia’s trade budget surplus, according to Alfa Bank analysts. The companies will have to pay off $38 billion in principal payments and $50 billion in interest payments. Alfa Bank economists believe the repayment will not affect the continued inflow of borrowed capital. “As regards the year 2008, we estimate that Russian banks will borrow at least $65 billion, and the companies will borrow $60 billion,” said Natalia Orlova, a chief economist at Alfa Bank.

Russian companies have borrowed external funds at a gallop in recent years. The corporate debt totaled $35.2 in 1998, whereas debt obligations in 2006 reached approximately $260 billion.

Experts point out the continued upward trend in debt growth. “The corporate debt grew by $50 billion in the first half of 2007. It is a phenomenal increase – it is higher than total corporate debt figures for 2006, which was a successful year, by and large,” said Anton Struchnevsky, an analyst at Troika Dialog, in an interview to

Rapid increase in corporate debt worries the Russian government. Officials fear that Russia’s companies will not be able to fulfill their obligations. As a result, companies will default on their loans. Alexei Ulyukayev, a deputy chairman of the Russian Central Bank, expressed in June his concern about accelerating rates of corporate debt growth, while State Duma Banking Committee Chairman Vladislav Reznik even called for imposing restrictions on companies’ borrowing policy with regard to foreign loans.

Alfa Bank economists stress the point that Russian companies’ corporate debt already totals 26 percent of Russia’s GDP. In other words, the debt levels may as well be considered as critical in accordance with the Maastricht corporate debt criteria adopted by the European Union. Under the Maastricht criteria, a corporate debt that is higher than 30 percent of GDP must be considered a threat to a country’s economic security.

Not unlike the government, experts are also concerned about the current situation. However, experts emphasize that a decrease in the world oil and natural gas prices could pose a real threat to the Russian economy. “In my opinion, this is a real problem, and the risks could play a role, especially if the oil prices drop,” said Oleg Solntsev, a senior expert at the Center for Macroeconomic Analysis and Short-term Forecasts. “The companies will experience difficulties in repaying such loans. Russian state-controlled companies account for 30 percent of net borrowings, and therefore the state will have to intervene in the situation. Debt to equity conversion is one of the ways for the state to pay the debts but the state will not do that if a controlling stake is at risk. The state can also pay the debts by tapping its national reserve fund and the national well-being fund,” added Solntsev.

At the moment experts believe that oil prices are unlikely to go down in the next decade or two. “Companies will run a high risk of falling in default should the world oil prices plummet. We are talking about a dangerous situation looming down the road – most analysts predict the oil prices will remain quite high in the next ten or fifteen years. Having said that, I cannot rule out the possibility of such risks,” said Valery Mironov, an expert at the Center for Development.

Translated by Guerman Grachev