Wall Street Journal - 09/11/98
By STEVE LIESMAN and MARK WHITEHOUSE
MOSCOW -- Bad as it is, the worst news from Russia's financial crisis may be yet to come.
Attention has focused on the foreign portion -- put at about $11 billion -- of the $40 billion in domestic debt that Russia defaulted on in August. An additional $20 billion in obligations of Russian companies to foreigners was covered by a three-month payments moratorium.
But the main uncertainty is what will happen to $180 billion more in government and corporate debts that are current only because few payments have come due since the crisis began.
That will change in a matter of weeks.
Beginning in November, the country is scheduled to pay at least $2 billion this year to foreign-government and commercial creditors. Next year, the figure balloons to at least $17 billion, with larger obligations on the country's Eurobonds, restructured Soviet debts and loans from the International Monetary Fund.
Central Bank reserves dwindled to $12.3 billion last week, down from $12.7 billion at the end of August, and only about $7 billion of that is cash. Government tax receipts have fallen sharply, and economists
don't see how the country will have money to stay current on its debts.
"I don't think there will be enough to cover the payments next year," says Peter Westin, an economist at Moscow's Russian European Center for Economic Policy.
First Hurdle in December
Analysts see the first major hurdle in December, when Russia faces an interest payment of $550 million on $30 billion in restructured debts from the Soviet era to the so-called London Club of commercial
lenders. The restructuring was only agreed to last year, and now Moscow could find itself asking for another. "It would be the first rescheduling of rescheduled debt in the last decade," says Dirk Damrau,
director of research at MFK Renaissance investment bank in Moscow.
With the government in turmoil, Russian officials have made no definitive statements on whether and how they will service their foreign debts. In the past, however, the country has made a priority of paying its post-Soviet obligations.
If Russia defaults, the news alone would shake the world's beleaguered financial system. But the real shocker could be in another wave of write-downs by foreign banks and investors. According to the Bank
for International Settlements, commercial banks from Germany, the U.S., France, Italy, Austria, the Netherlands, Japan and the United Kingdom had $56.5 billion of claims outstanding on Russia at the end
of 1997. German banks lead the pack with $30 billion, followed by U.S. and French institutions with about $7 billion each.
So far, banks have publicly accounted for only about $10 billion of that in actual losses and potential exposure, according to Charles Prescott, managing director of the banking group at Fitch IBCA, a British ratings concern. He estimates that $29.4 billion more is covered by government guarantees or hard-currency exports. That leaves $17 billion unaccounted for.
"Banks should be announcing sharply increased provisions related to Russia over the next few months," he says.
Eurobond Exposure
The country's Eurobonds were its highest class of debt, held by emerging-market mutual funds and even some U.S. pension funds, though the latter's exposure was small. It's unclear from recent announcements by foreign banks if they have written down these debts to their current values of little more than 20 cents on the dollar of face value.
U.S. analysts and regulators say that for the most part, the write-downs haven't included foreign-debt instruments such as Eurobonds. But U.S. banks' exposure was limited and steadily whittled down all year. "I don't think there is a lot of exposure left," says Tanya Azarchs, an analyst with Standard & Poor's Ratings Services in New York.
But Fitch estimates that private creditors as a whole stand to lose as much as $100 billion on Russia, calling it potentially "the largest single credit loss ever suffered by the international banking community." The agency recently downgraded Russia's sovereign debt rating to CCC. No other country -- not even Indonesia -- has such a low rating from Fitch.
Even Russia's former economic czar, Anatoly Chubais, refused in a recent interview to rule out default on the sovereign debt. "It is a huge danger," Mr. Chubais, who was recently fired by President Boris Yeltsin, told a Russian newspaper. "It is hard to avoid, but impossible to afford. I shall not even discuss it."
Few Precedents for a Default
Russia must keep its foreign debt current to have any chance of returning to foreign markets. A default would make Russia one of the few countries ever to renege on restructured debts with the Paris and
London clubs.
Russia would achieve another dubious distinction, held so far by mostly small countries such as Cambodia and Guyana, if it defaulted on its $14 billion in debts to the IMF. The country is scheduled to
pay at least $3.3 billion next year to the IMF.
Analysts believe Russia is most likely to make good on its Eurobond debt. That's possible with payments of $720 million due this year and $1.6 billion in 1999. But much depends on whether the country feels it has anything to gain from keeping in good stead with foreigners. If the new government believes it will never have a chance to borrow abroad again for years, it might choose not to service the Eurobonds.
But the most likely victims are holders of "minfin" bonds, the restructured internal debt of Vneshekonombank, the Sovietera commercial bank that defaulted on $8 billion of deposits when the
Soviet Union collapsed.
Meanwhile, Russia defaulted on $40 billion of treasury bonds, known as GKOs and OFZs, that come due in 1998 and 1999, but left unclear what would happen to an additional $20 billion of notes with later
maturities. That debt is denominated in rubles, and has depreciated with the fall of the Russian currency from around 6.2 rubles to the dollar a month ago to 12.87 Thursday.
Sberbank, the state savings bank, had about half of its assets in restructured GKOs, and its future is also uncertain. The government has guaranteed the bank's 120 billion rubles ($9.32 billion) of deposits. A Central Bank spokeswoman insists the government will honor its guarantee "even if we have to print money."
That may not be easy. "Politically, it's very difficult for them to freeze deposits," says Boris Sinegubko, banking analyst at the Brunswick Warburg brokerage house in Moscow. "But it's also very difficult for them to print money to save Sberbank."
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