Russia's debt time bomb brought into focus by Dubai

Moscow: Russian companies are sitting on a multi-billion dollar debt time bomb after allowing overseas borrowings to rise since April, heedless of default fears that dogged them in early 2009.

Bankers say a failure to complete restructurings may hamper Russia's ability to borrow in the future and the absence of clearly defined negotiation guidelines between Russian and western lenders raises the risk of future defaults. Currency and commodity markets have been unexpectedly benign for Russia since June, helping to stave off a widely forecast debt disaster, but Dubai World's debt woes have served as a reminder that the problem has merely been postponed.

Conglomerate Dubai World said last month it would need a repayment freeze on some $26 billion of debt after a downturn in the global property market left it unable to service borrowings.

"There is a need for restructuring for a lot of Russian companies. We all hope the market will continue to get better, but the rouble lost 2 percent (after the Dubai World announcement) so nobody can predict what will happen," said Roman Malovitskiy, a debt restructuring lawyer at Moscow''s EPAM. Russian foreign non-government debt rose to $441.2 billion in October from $420.7 billion in April as businesses continued to borrow against a backdrop of falling interest rates and the rise of the rouble against the dollar. UBS is forecasting a rise next year to around $500 billion after Russia returns to market with a sovereign Eurobond which should set a new, lower benchmark interest rate for Russian borrowers. Central bank data shows that $153 billion is repayable by non-government enterprises and banks by 2010.

Appetite for Russian debt by foreign banks has also been driving the trend, meaning both sides are to blame.
Most have failed to address their debt through restructuring talks that began feverishly in the early months of 2009. Only aluminium giant UC RUSAL -- which agreed a $7.4 billion deal with around 70 international lenders last week -- and steel and coking coal producer Mechel''s $2.6 billion package are the exceptions.

"There were only two names that went beyond standstill. What happened to (the rest)? The debt is still hanging like a black cloud over us," says one senior Moscow-based banker, who asked not to be named.

The far larger group of companies yet to complete deals include examples from a shopping basket of sectors.
Evraz is one steelmaker to have over-borrowed during the boomtime, Daimler-backed truck-maker KAMAZ is in talks with lenders and has warned that it may have to rely on state support, and business media provider RBC will be one of a string of firms to be rescued by billionaire Mikhail Prokhorov if talks are successful.

"It is easier to assume for some companies, either through good modelling or wishful thinking, that when the cycle changes the company will make money again ... (But) the problem has been postponed," said Renaissance Capital analyst Petr Grishin.

Moscow rules

Some Western bankers and lawyers warn that while debt negotiations in the past have proceeded in good faith, legal principles and global best practice are not in place in Russia to ensure key elements of successful
restructuring.A solution could be to draw up a set of guidelines that would be recognised by both Russian and Western banks --which sources have dubbed 'Moscow Rules' after the Soviet era spy code made famous in John le Carre novels.

The idea is based on guidelines for British debt talks known as the Insolvency Principles or "London rules", approved by the World Bank, Bank of England and British Bankers Association. "I strongly recommend we have it for Russia -- we do not have proper rules of play. In practice we have, but it you would prefer it to be written down," Malovitsky said, adding that one restructuring deal he worked on was initially dogged by tension between foreign and Western lenders.

"There were misunderstandings between Russian and foreign creditors as they had different targets," he said. The rules would likely need government backing to have teeth and to ensure the co-operation of Russia''s largest banks, which are state-controlled.

The Moscow senior banker said Russian entities need to understand "what it will do for the long term economic environment and the availability of credit" if they cannot pull off a debt recovery.