PILBARA

58
RISK UPDATE | Russia
AUGUST 2014 | Resource Global Network
59
US legislators were careful not to include
the political dimensions of the crisis unfold
equities in the latest round of sanctions. Still,
and the effects of the latest measures; there
a potential credit event caused by default on
are questions also as to how long sanctions
FX bond issues could trigger reimbursement
will remain in place and what, if any,
of credit default swap protection that may
additional measures might constitute, though
not be recoverable via a bond auction
the anticipation of a Cold War scenario is
given the sanctions imposed. The legal
invariably already stirring a negative market
ramifications are endless, especially where
reaction.
third parties and/or different currencies
are concerned, but the various possibilities,
The government is confident that GDP
including potentially more punitive sanctions
growth will exceed its prediction of 0.5% for
PHOTO : RENEWER / SHUTTERSTOCK.COM
on the financial system, are rattling the
markets and likely to worsen paper asset
2014, and it may be right. However, with
industrial production declining and other
of 20 state firms and 99 officials and close
to have more meaningful effect on highly
values over the short term.
parts of the economy affected, PRS suspects
oligarchs. De-escalating a crisis on Europe’s
doorstep has made the EU partners less
reluctant to go down this route, especially
leveraged corporations seeking to rollover
large debt burdens, though at the risk of
retaliatory action with the exclusion of US
Worse to come for the
economy
that in view of the lack of structural reform,
and with investment falling, Russia will
plunge headlong into recession regardless of
given the investments in Russia’s vast and
and indeed other western firms from the
The available data suggest the economy is
its hydrocarbons production and/or potential
lucrative market by German exporters and
Russian market.
withstanding worst-case expectations, having
spike in oil prices.
the British equally fearful of a withdrawal of
posted growth of 1.1% year on year during
wealthy Russians from London. Support for
Many of Russia’s corporate borrowers
January to May. The capital outflows that
Rouble devaluation has conveniently
new measures targeting Russian companies
had seen debt markets begin to thaw as
were triggered by the initial shock of Russia’s
eradicated the budget deficit by raising
and blocking infrastructure financing
the second round of sanctions stalled.
actions in Ukraine, totalling some $80 billion
the dollar price of Russia’s hydrocarbons
supplied by the European Investment Bank
However, Russian central bank financing
through to May, and that led the central
exports. Yet there is uncertainty over the
and European Bank for Reconstruction and
for its commercial banks skyrocketed above
bank to raise interest rates and intervene in
government’s longer-term plans to tackle
Development have not been embraced by
US$140 billion by April, and with access now
the foreign exchange market to stabilise the
the deficits arising in 2015/16 with economic
Paris either, which is keen to keep lines of
denied to longer-term financing many will
currency, worked to considerable effect. The
projections unlikely to be met. Given the
trade open with new French-manufactured
now need to abandon bond listings and
past few months have seen both the rouble
difficulties involved in identifying sufficient
warships about to be delivered.
turn to the state for funding debt rollovers.
and asset prices rebound, easing the fears of
cuts in state expenditures the government
Russia has ample reserves of some $476
imminent collapse.
has handed the regional governments the
A new package of measures from the Obama
billion accumulated from its oil and gas
right to introduce a sales tax of up to 5% on
administration will have more impact by
receipts as of late June, but not all of that
The economy was nonetheless in a weakened
goods in large retail stores. Many suspect a
restricting the access of Russian firms to US
comprises liquid assets, and loans to Russian
state prior to the crisis, growing by just 1.3%
federal tax will be contemplated alongside
capital markets. Judging by the reaction of
corporations are likely to result in higher
last year in contrast to the 8% growth rates
reintroducing an excise tax on gas exports.
Russian officials and chief executives of the
four firms targeted, Novatek and Rosneft in
the energy sector, and lenders Gazprombank
interest rates.
With Morgan Stanley poised to offload
prior to the global financial crisis, and the
situation is invariably about to become much
worse as sanctions bite, and in reaction to
________________________________________
www.prsgroup.com
and Vnesheconombank, such tactics are likely
its oil merchanting business to Rosneft,
policy tightening. Much will depend on how