Debt Restructuring Plan Denied

Russia denied seeking to restructure as much as $400 billion in companies' foreign debts on Tuesday after a Japanese newspaper said a local banking lobby group had asked the government to help negotiate with creditors.

The report in Japan's Nikkei newspaper prompted a sell-off in the euro, which dropped more than 1 percent against the yen and the dollar before denials from Russia and the banking lobbyist who was cited as a source for the story.

"The government of the Russian Federation does not plan to consider the issue of restructuring the corporate debt of Russian banks and companies," Finance Minister Alexei Kudrin said.

Kremlin chief economic aide, Arkady Dvorkovich, said no such proposals had been made and that Russian corporations were continuing to service debt as normal.

Nikkei quoted Anatoly Aksakov, president of the Russian Association of Regional Banks, as saying the group had asked the government for help in talks with creditors.

Aksakov later said the corporate-debt restructuring plan was only an idea and had not been submitted to the government.

"What was printed in the paper, with reference to me, is untrue," Aksakov said.

"The idea is that it would be good if all creditors agreed about the restructuring of debt. The essence is that foreign banks would like unified restructuring principles and for the Russian government to be involved," he said.

Though the Nikkei report was slapped down by the Kremlin, the market reaction indicates concern among many investors about $136 billion in foreign debt and interest which Russian corporations must pay this year.

Fitch this month cut Russian foreign and local currency ratings by one notch to BBB, two rankings above junk, after a similar move by Standard & Poor's, which in December became the first agency to downgrade Russia in a decade.

The spread between Russian sovereign debt and U.S. government debt widened about 11 basis points to 588 basis points, according to JPMorgan indexes. Russia's benchmark 2030 eurobond was little changed.

The euro was down about 1.2 percent at $1.285 earlier but was trading at $1.296 at the end of the day. Traders said the euro moved because of the European Union's strong trade ties with Russia and EU banks' exposure to Russian borrowers.

"Even though the denials are now being reported, the story will weigh on sentiment towards Russia, the European banks and the euro through this morning as many will take the view that where there is smoke there is a story," said Chris Weafer, a strategist for UralSib.

Some of Russia's biggest companies borrowed billions of dollars in the boom years under former President Vladimir Putin and have been badly hit by the economic crisis.

Russian banks had $198 billion in outstanding foreign debt as of Oct. 1 and non-financial institutions had $300 billion, according to the latest data available from the Central Bank.

The Nikkei business daily had reported that some foreign banks, including HSBC and Deutsche Bank, had indicated that they would like to have debt-refinancing negotiations. Deutsche Bank and HSBC both declined to comment.

"There are no such plans in the government," said government spokesman Dmitry Peskov. "Information regarding any talks with foreign banks on the subject of restructuring does not reflect reality."

Russia has spent more than $10 billion on helping refinance corporate debts. But it recently said it would use the rest of the $50 billion facility for other unspecified objectives.

Debt traders note that some Russian corporate eurobonds are trading with yields as high as 80 percent, indicating high default risk.

And the Nikkei report brought back memories of the chaotic years under late President Boris Yeltsin and the 1998 crisis, when Russia defaulted on $40 billion in debt and allowed the ruble to collapse.

"Putin's big picture vision is for Russia to avoid a return to the devaluation-cum-default of 1998-2000, when Russia was forced to go cap in hand to foreign G7 creditors," said Tim Ash, an economist at Royal Bank of Scotland in London.

"The Putinists absolutely detest the Yeltsin era, it is their nemesis, and will do everything possible to avoid a rerun of the absolute humiliation of 1998," he said.