Article / 15 July 2016 at 10:00 GMT

Foreign buying driving up Russian debt

Russia oil and gas expert
United Kingdom
  • Russian debt posts a marginal rise in H1'16
  • Central bank report shows reserve requirements met
  • Telecom firms to foot bill for surveillance plans

A new report on Russian debt shows foreign buying is on the rise, 
but domestic purchases seem to be keeping pace. Photo: iStock

By Nadia Kazakova

The central bank note on the size of Russia's external debt as of end the first half of 2016 was notable less for what it mentioned than what it did not. The central bank said that the total external debt of the Russian federation was up by $3 billion to $521.5 billion in H1. 

The rise in Russia's external debt (both rouble and FX debt owed to non-residents) came down to non-residents buying more government debt denominated in roubles. It was also due dividends accrued to non-residents which are shown as external debt until paid. 

What the central bank forgot to mention, however, is the successful placement of the Eurobond in Q2, which should have raised some $1.75 billion for the government and, presumably, increased the outstanding external debt. 

Forecasts reflected substantial demand from non-residents, as was reported at the time. The central bank data, however, suggest that most of the new bonds must have ended up with Russian domestic investors as of the end of H1.

Russia's external debt and its change as of end H1, $ billion:
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According to the central bank data, non-residents held $12.1 billion of sovereign FX bonds as of July 1, 2016, slightly up from $11.9 billion as of end Q1 but down from $12.6 billion as of the beginning of the year. This means that non-residents were net sellers of Russian FX bonds in H1, despite the fact that there has been no repayment of principle in H1 and the government placed $1.75 billion of new Eurobonds in May 2016.

This is not entirely surprising given the restrictions on, and the uncertainties around, trading the new Russian Eurobonds by non-residents. Russian banks, on the other side, might have been enticed to buy the new issue given its risk-free status on their balance sheets (unlike non-government FX debt instruments which require the bank to put aside some reserves).

The marked increase in rouble-denominated government bonds held by non-residents in H1 might be partially explained by a stronger rouble. The Russian currency moved from 72.9 (versus the USD) on December 31, 2015 to 64.2 on June 30, 2016. 

This could have automatically increased non-resident holding of the sovereign rouble bonds by over $2 billion.

Russian external debt dynamic in 2015-2016, $ billion:

Overall, however, foreign investors must feel relatively comfortable buying into rouble-denominated sovereign debt and rolling over most private external debts. At least superficially, Russia does not look too bad with an external debt-to-GDP ratio of around 41% as of the end of H1. It has actually fallen from around 47% as of end-2015 due to a stronger currency.  

There must be some concern about the state of the Russian economy, especially in the light of recent legislative changes pushed through the parliament at breakneck speed. Russian telecom companies are now required to have six months' worth of all mobile data stored in minute detail as well as analysed (attributed to individuals, for instance). 

Telcos are to foot the bill for this, which would reduce their investments elsewhere. It could also raise prices for consumers, who would be effectively paying for being spied upon. Not to mention that the data could find their way to unscrupulous individuals in various enforcement agencies. 

This is certainly far from ideal for the business climate and for Russia's ability to pay its debts in the future. For short-term bond investors, however, it does not seem to matter. They can think of it tomorrow.

Whatever the security justifications, surveillance remains an expensive game. Photo: iStock

— Edited by Michael McKenna

Nadia Kazakova is an expert on the Russian oil and gas industry


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