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Russia: Tougher funding times ahead

Market participants say that the borrowing binge by Russian banks and corporates in recent years could come back to haunt them, given the much tighter credit market conditions in 2008.

As a recent report by RBC Dominion Securities highlights, after raising overseas funding of $87 billion in 2006 and $93 billion in 2007, external debt repayments will total about $45 billion this year. "Unless we see a near-term turnaround in global credit markets, second/third-tier Russian banks/corporates could have difficulty accessing refinancing credit at any cost, exposing all Russian borrowers to higher financing costs if default headlines emerge," the report says.

It adds that market conditions are not only tougher internationally but also domestically. "We continue to detect signals that tighter global credit markets are weighing negatively on Russian domestic funding markets, with the swap curve moving 100 to 120 basis points higher since end-2007." RBC Dominion estimates that bank/corporate domestic debt refinancing needs this year amount to $16 billion to $18 billion and says that, given total debt financing this year of $60 billion to $65 billion, even if global credit markets stabilize, a heavy new-issue supply pipeline should cap any downside in local yields.

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