As a fully paid-up member of the BRIC emerging economies, Russia has long been thought of as a pure commodities play. Oil and gas are the main themes and everything else is second string. It is also, unfortunately, thought of as a kleptocracy, where the power elite at various levels in the hierarchy, from regional mayors and on up the chain, apparently see nothing wrong in profiting personally from their political position, and where private property is anything but safe if someone higher up the tree takes a fancy to it. The tale of Yukos, once Russia’s most successful oil company, and two of its founding directors, Mikhail Khodorkovsky and Platon Lebedev, covered in an earlier blog, more than make the point.
And yet Russia does have very large oil and gas reserves, which gives it the financial muscle to progress to a more globally acceptable model of corporate governance – if only its rulers could be bothered. What it also has going for it, and this is a theme that Deutsche Bank Research homed in on recently, is an extraordinarily low debt to GDP ratio. At a time when the Bank of International Settlements is warning that US and UK GDP could soar to totally unmanageable levels within a decade or so (looked at in this earlier blog), Russia’s current public debt to GDP ratio looks particularly pleasing. The trajectory of Russian debt has been in the opposite direction to developed markets, declining while theirs has been rocketing upwards, largely thanks to Russia’s increased production capacity and the rise and rise of the price of oil.
Deutsche Bank Research (DBR) picks up on this improvement in the Russian debt ratio, commending the fact that it is now down to around 10% of GDP. However, the DBR analysts point out that all is not absolutely perfect in Russia’s low debt to GDP figure. They point out that the Russian Government still has very substantial stakes in a whole swathe of Russian corporates and banks. Privatization has only gone so far and the Government still has a finger in many pies. Since the government still owns large chunks of corporate and bank assets, it follows that the State is implicated in any company bonds taken out by companies where it is a significant shareholder.
On this logic, DBR argues that it makes sense to lump Russian “quasi-sovereign bonds” and syndicated loans in with the official Russian Government debt. “As Russian quasi-sovereigns have received state support in the past, it is relevant to examine their debt positions in order to quantify possible contingent liabilities for the Russian Government,” it argues.
If one does this, then Russia’s debt to GDP ratio doubles to 20%. While this is still a level that the UK, for example, and Greece certainly, would love to be at, DBR mounts a kind of “thin edge of the wedge” argument to suggest that if anything happened to drive down the price of oil, Russia’s debt to GDP ratio could zoom up to in excess of 60%.
"The baseline scenario takes into account that the oil price needed to balance Russia’s budget has increased significantly and that spending pressure is likely to remain high. Downside and upside scenarios are very sensitive to the development of the primary fiscal balance, which itself is heavily impacted by oil price developments. The public-debt-to-GDP ratio could almost vanish in an upside scenario or increase to 60% of GDP in a downside scenario."
In other words, while the dark days of a Russian debt default now seem well behind us, and while DBR expects Russian public debt levels to continue to be modest in 2020, things could change and change fast. While the public debt to GDP ratio has been coming down in recent years, there has been a veritable explosion of corporate and bank debt in Russia, with the Government ultimately being exposed to a fair bit of this. A contingent liability shock caused by quasi-sovereign debt could raise [Russian] public debt to GDP levels to above 40% by 2020,” it says – adding that the 40% level is associated with increasing debt sustainability problems in emerging markets. One to watch.
Further information on the economy of Russia and the Sovereign Debt Crisis:
- Lessons from Russia, by Bruce Misamore
- Review of 2010: Russia and commodities, by Ian Fraser and Anthony Harrington
- 2011: The Year Ahead - Russia’s prospects and problems, by Ian Fraser and Anthony Harrington
- Where does Wikileaks’ description of Russia as a “Mafia state” leave the Russian economy? Part One, by Anthony Harrington
- Corporate Strategies in Central and Eastern Europe (CEE) from 2009 to 2011, by Nenad Pacek
Tags: commodities , debt to GDP ratio , gas , khodorkovsky , kleptocracy , oil prices , Russia , sovereign debt , Yukos