Russia - 01/08/2015

RUSSIA RATING DOWNGRADE

Alexander Mercouris, via Facebook

We must prepare ourselves for the reality that the ratings agencies are going to downgrade Russia very soon.

There is absolutely no logic behind this decision. Russia's sovereign debt is just $57 billion of which no more than $2.3 billion is due for repayment this year. The idea that Russia is going to default on its sovereign debt is a fantasy. Some Russian state companies seem to have run into temporary dollar payment difficulties in December (the reason for the rouble crash on 16th and 17th December 2014) but with help from the government and the Central Bank (which I suspect is the main reason for the reported fall in the reserves) that problem has passed. As both Jon Hellevig and I have pointed out, the companies in question are Russia's major exporters with a significant part of their cash flow in dollars and with significant foreign currency reserves of their own. They are not by any stretch of the imagination insolvent so whatever temporary payment difficulties they run into they are almost by definition able over the not so long term to ride any temporary problems out. By contrast with the situation in 2008 Russian companies are actually net creditors in relation to their foreign currency assets and liabilities. As for the devaluation of the rouble, whatever problems it causes (and they should not be underestimated) it should at least ensure that the country continues to run a trade surplus and that its budget is protected.

However as we all know US ratings agencies are not politically neutral organisations so despite all the things I have said I believe a downgrade is a virtual certainty.

I wish I could say that it will have no results. Unfortunately that would not be true. Some of the loans that have been taken out will unfortunately become repayable in the event of a downgrade. In a radio interview Economics Minister Ulyukaev guesstimated that the cost for the country of a downgrade will be between $20-30 billion in 2015. All the more reason for Russia to deleverage and sort out its own domestic sources of funding whilst building bridges east.

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