Russian borrowers will face increasing problems obtaining trade finance as US and EU sanctions begin to impact the country’s banking sector.
In an exclusive conversation with GTR, head of international legal at Tatneft, one of Russia’s largest oil producers, Peter Gloushkov, describes a nervous new environment for Russian borrowers, in which it is becoming difficult to predict where future financing may come from.
“We have a whole new world that is completely unknown,” he says. “No one knows how other players will react. Tatneft is lucky because we don’t need to seek external borrowing at this time, but many companies will be feeling a little lost in terms of what they’re going to do.”
“I don’t think anyone would have thought a couple of months ago that we would be faced with the current environment. If you’re a company that needs to borrow US$1bn in Russia at the moment, it will be extremely difficult to work out what your options are,” he adds.
An Atradius Country Report on Russia, published this month, indicates that the Russian government will be more than capable of propping up the banking sector in the near term.
With a plan to spend roughly 60% of its US$90bn National Reserve Fund (NRF) on infrastructure projects, the government aims to support the Russian economy through the potentially hard times ahead. Russian public debt, which has remained relatively stable at around 8% since the 2008/09 crisis, is set to decline in 2015, according to the report.
The real test for Russia’s traders could come if and when the government’s capital reserves begin to dwindle. “In six months’ time, if the sanctions continue, the Central Bank of Russia (CBR) and the state will have to use an interesting combination of resources to protect the banking system and maintain stability,” senior economist at IHS, Antonio Timoner-Salva, tells GTR.
IHS this week downgraded the sector’s outlook from stable to negative, and Timoner-Salva foresees further bad news: “The situation could get really ugly and we may have to downgrade again. At the moment the outlook is for sanctions to get progressively worse.”
State-owned lending giants like Sberbank and VTB Bank, which the West has blocked from its capital markets, will likely receive state support to carry on servicing banks and corporates within Russia. “The CBR will continue to provide them with liquidity facilities and discount windows with different maturities,” says Timoner-Salva.
“State banks may also be allowed to convert outstanding central bank loans into qualifying capital, giving them more capital buffers to withstand the potential rise of non-performing loans and assets, securing their ability to continue day-to-day operations.”
But Gloushkov doubts whether government support will sufficiently trickle down into the wider banking sector so that trade can continue as normal. “State support will not be available for everyone,” he says. “It may only be available for those very large projects. The government won’t be able to support everybody.”
It is reported that Russian banks and corporates are looking to China and Latin America for future financing, but for Gloushkov, both scenarios pose difficulties: “Latin America is seen to be too exotic, and everyone’s saying let’s borrow from China, but of course Chinese money won’t come for free.”
“The Asian markets aren’t big enough,” he adds. “They couldn’t accommodate so many requests from Russian borrowers. Most Asian banks are relatively small when looking at the financing needs of some Russian corporates.”
Even when looking to Asian markets, the spectre of sanctions is never far away. This week, Japan has joined the West in imposing sanctions on five Russian lenders: Gazprombank, Rosselkhozbank, Vnesheconombank, Sberbank and VTB Bank.
“There’s a perception that sanctions can impact business anywhere,” says Gloushkov. “It would be a big mistake to think that borrowing in Singapore, for example, would not be affected by sanctions.”
There are also signs Russia is looking more hopefully towards the Middle East. The Association of Russian Banks (ARB) has for several months been urging the CBR to push forward with Islamic finance legislation. The ARB has proposed the creation of a working group, advised by Russian Islamic clerics, to set up a new division within the CBR to oversee Islamic banking activity.
“The latest round of sanctions is squeezing foreign financing and Russian lenders are exploring alternative ways to raise funds outside the European and US markets,” adds Timoner-Salva.
“Offering shariah-compliant financing would be a complementary strategy, attracting additional investment from Islamic countries in the Middle East and Southeast Asia.”