Rus­sia’s banks could once more be its airbag in deal­ing with new round of sanc­tions

Global Times - - Biz Comment - The au­thor is Ge­orge Hay, a Reuters Break­ingviews colum­nist. The ar­ti­cle was first pub­lished on Reuters Break­ingviews. bi­zopin­ion@glob­al­

Rus­sia is lim­ber­ing up to use its banks as a lifebelt – again. Fi­nance min­is­ter An­ton Silu­anov said on April 11 that do­mes­tic lender Promsvyazbank could lend emer­gency funds to United Com­pany Rusal, whose shares have been smashed by US sanc­tions an­nounced on April 6. If Rusal her­alds the start of a wider as­sault, Moscow can de­ploy some fa­mil­iar airbags.

The good news is that Rus­sia’s econ­omy is in a health­ier state than in 2014, the last time it was sub­ject to a sanc­tions shock. In­fla­tion is low, gov­ern­ment debt is un­der 20 per­cent of GDP, and higher oil prices com­bined with fis­cal pru­dence means the Min­istry of Fi­nance added $14.5 bil­lion to the state’s for­eign cur­rency re­serves last year. A cur­rent ac­count sur­plus has off­set per­sis­tent pri­vate sec­tor out­flows.

The bad news is that the new style of sanc­tions will make it harder for com­pa­nies to bor­row from or even trade with US per­sons, likely caus­ing out­flows to spike. Were the US to im­pose sim­i­lar re­stric­tions on more than just a hand­ful of com­pa­nies, Rus­sia would strug­gle. The cen­tral bank’s for­eign ex­change re­serves only cover two-thirds of the $500 bil­lion to­tal debt owed to non-res­i­dents, ac­cord­ing to Moody’s. For­eign in­vestors hold about $50 bil­lion of for­eign cur­rency cor­po­rate debt due this year.

Rus­sia could help with some old ma­noeu­vres. When oil giant Ros­neft needed help re­pay­ing for­eign cur­rency debt in 2014, it got it by is­su­ing bonds to Rus­sian bank Otkri­tie, which swapped them for for­eign cur­rency with the cen­tral bank. Given that the Rus­sian state con­trols Sber­bank and VTB, the two big­gest banks, it could look into us­ing a sim­i­lar ar­range­ment again.

The ob­vi­ous prob­lem with do­ing this is the risk to bank cap­i­tal po­si­tions. But the two big banks are ad­e­quately cap­i­tal­ized, and the cen­tral bank could re­peat an­other ruse from 2014. Then, it shielded the banks’ cap­i­tal from losses by a tem­po­rary fiat.

Such mea­sures would have to be stop-gaps, but that may be enough. West­ern coun­tries are un­likely to con­fer Rusal-style sanc­tions on all Rus­sian com­pa­nies. Gazprom sup­plies a big chunk of Euro­pean gas, af­ter all. If the pic­ture does de­te­ri­o­rate, Rus­sia will have to get even more cre­ative.

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