RISK ASSESSMENT

RUSSIA

RISK ASSESSMENT

Impact of the credit crunch
The financial crisis hit the Russian economy hard in autumn 2008 with the ruble and stock market indices falling and the interbank market in gridlock. The government intervened via state-run banks to bolster companies faced with heavy debt service denominated in foreign currency. Repayment of private debt will remain a risk that bears watching in 2009 with companies and banks having accumulated considerable debt owed to foreign creditors (syndicated bank loans or eurobonds). In the context of aversion to risk that will still prevail in 2009, refinancing that debt will be no easy matter. With foreign exchange reserves still large and public sector debt limited, government officials have the means to intervene to stem a wave of defaults. In the banking sector, however, there are still too many under-capitalised actors alongside solid state-run banks with the lack of reforms thus making it very vulnerable to a crisis of confidence. And it is not certain that the crisis will provide the impetus for the necessary restructuring. As such, bank credit, which has been very dynamic in recent years, will likely suffer a profound slowdown.

Economic weakness
In this context, the economy has been in a marked slowdown phase since late 2008 with GDP growth likely to contract in 2009. Household consumption, the main economic engine since 2000 will decelerate sharply amid increasingly scarce credit and falling prices of oil, which had contributed to the explosive growth of household income. And the first wage payment failures already began to occur toward the end of 2008. The falling prices will moreover not only hobble oil production, they will no longer be able to mask the stagnation of production already apparent in 2008, a trend attributable to the lack of investment in the energy sector.
The current economic slowdown will particularly weaken retailing, automotives, and a metals sector where prices have also been falling. By end 2008, companies in these sectors announced staff reductions and a drop in production.

Deteriorating corporate payment behaviour
Coface monitoring records on Russian companies reflected a deterioration of their payment behaviour even before the international financial crisis began to have a tangible impact on the economy. That trend is attributable to persistent corporate governance difficulties with the instability of ownership structures, the weakness of the courts and, particularly, of creditor protection, and the relative opacity of corporate accounts continuing to mark the business environment. In this difficult context, the economic slowdown and the problems facing some sectors are expected to spur a new surge of payment failures in 2009.