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Mish's Global Economic Trend Analysis

Russia Debt One Grade Above Junk With Downgrades Coming, How Likely is Default?

Posted: 27 Dec 2014 12:34 PM PST

All three rating agencies are expected to downgrade Russia's debt to junk soon and bailouts to Russian banks are on the rise, but how likely is default?

The Financial Times reports ...

Russia trebled the size of its bailout of troubled lender Trust Bank to Rbs99bn ($1.9bn) on Friday, laying bare the growing financial fallout from its currency crisis and the slump in the price of oil, its main export.

The rapidly rising cost makes the rescue of Trust bank, which foundered as the rouble collapsed early last week, the second-largest seen in Russia. It has now consumed a tenth of the money earmarked by the government last week for bank bailouts.

The authorities also said they would spend Rbs320bn ($5.9bn) propping up two other banks. Anton Siluanov, finance minister, said state-owned VTB, the second-largest lender by assets, could receive Rbs100bn before the end of this year and another Rbs150bn in 2015, while Gazprombank could be allocated Rbs70bn.

Trust Bank was the first financial institution to fall victim to the currency crisis as it suffered a run on deposits by customers panicked by the steep drop in the rouble's value, which at one point on December 16 plummeted to an all-time low of 80 against the dollar.

The central bank said that the state-run Deposit Insurance Agency would provide Trust Bank with up to Rbs99bn. It would give an additional Rbs28bn loan to Bank Otkritie, one of Russia's largest private lenders, to restructure Trust Bank, with the two then merging by the end of 2020.

Foreign Reserves

Although US and EU sanctions make it difficult for Russian companies to obtain financing, and although the Russian banking system is a mess, sovereign default will only occur if Russia cannot meet its foreign debt obligations.

Russia has about $4000 billion in foreign currency reserves, lowest since 2009, but foreign currency obligations for 2015 total about $120 billion.

On that score, the immediate risk seems slim. In fact, one has to wonder if the impending downgrade to junk is politically motivated.

Regardless, the US severely underestimates the fallout, especially to Europe, should default occur.

Sanctions are economic madness and Obama's claim they are working is preposterous. For further discussion, please see Russia Under Attack: Letter from CEO of Genoil to CEO of JPMorgan Chase on US Foreign Policy Blowback

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com