Russia returns after nightmare on Bond Street

3rd August 2009, Comments 0 comments

Russia's under-reformed economy has been hit hard by the global slowdown and the country is facing dwindling revenues over the next years amid a lower oil price and dwindling tax receipts.

Moscow -- Russia plans to borrow from the international debt markets for the first time in 10 years, with the need to replenish state coffers depleted by the crisis overriding the trauma of its 1998 default.

The country is planning to issue eurobonds with a volume of 17.8 billion dollars in 2010, followed by 20.7 billion dollars in 2011 and 20 billion in 2012, according to the finance ministry's plans.

Russia's under-reformed economy has been hit hard by the global slowdown and the country is facing dwindling revenues over the next years amid a lower oil price and dwindling tax receipts.

Finance Minister Alexei Kudrin said Russia could even tap the markets as early as 2009. "If we see that the conditions are favourable we will not restrain ourselves," he said this week.

But economists warn that while market conditions are right for such a move, the government is running a risky strategy by allowing its debts to accumulate with a bond issue.

"There are many uncertainties. Are foreign investors going to buy and at what yield?" asked Anton Struchenevksy, an analyst at Troika Dialog investment bank in Moscow.

He expressed fear of the consequences if Russia's debts continued to increase and investors stopped buying the bonds after a certain period. "Then something similar to 1998 could take place."

For Alexei Goryaev, an assistant professor at Moscow's New Economic School, the success of the move will depend on whether oil -- Russia's most important export -- appreciates in the medium term to replenish the treasury.

"If the price of crude solidifies, then we can say that the government had the right strategy. If this doesn't happen then this could effectively lead to a new default."

In the chaotic 1990s after the collapse of Communism, Russia issued a succession of sovereign bonds, building up ever-greater debts, and then spectacularly defaulted in the wake of the 1997-98 Asian financial crisis.

The default left a major psychological scar on Russian policy-makers and the government has repeatedly sought to assure the population that there will be no 1998-style meltdown during the current crisis.

Helped by record oil prices, Russia built up budget surpluses in recent years but the crisis has now again sent its budget into deficit.

The planned eurobond issue shows the government -- which is closely watching any signs of social unrest prompted by the crisis -- is not worried about going deep into debt in the upcoming years.

Prime Minister Vladimir Putin appears convinced that building up a budget deficit was better than cutting down on state expenditures for social assistance and development programmes.

"Given that Russia has not called on debt markets since 1998, this is a radical change in economic policy," the financial daily Vedomosti wrote in an editorial.

Russia has for the last 10 years enjoyed a degree of economic independence by not calling on foreign debt markets, and Vedomosti said a new issue could make its politicians more conscious of world opinion.

"The chance of acting without regard for the opinions of ratings agencies and investors allowed Russia to get mixed up in the Georgia war, turn off the gas to Europe, play hardball on missile defence and come up with odd decisions over WTO accession," it said.

Putin has said the government can run a deficit of 7.5 percent in 2010 without harming macroeconomic stability.

"I should say frankly that this is the maximum deficit we can afford," he said, adding the budget deficit should decline to 4.3 percent of GDP in 2011 and less than 3 percent in 2012.

According to Kudrin, the budget deficit could be as much as 9.3 percent of GDP in 2009.

A good sign for Russia came last week when new bonds offered by state-run gas giant Gazprom were heavily oversubscribed by investors.

Analysts have said Gazprom bond issues are partly aimed at helping the government test out investor appetite for Russia.

"It is an ideal moment for placements on the bond market," said Sergei Kolesnikov, analyst with Metropol investment bank.


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