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. Last Updated: 07/27/2016

Banks Urged to Reschedule Debts




Struggling to save the banking system from collapse, the Central Bank on Tuesday told Russian banks to take advantage of a debt moratorium to meet foreign creditors and reschedule payments.


The order follows an announcement Monday imposing a 90-day moratorium on the repayment of banks' foreign obligations. Of a total of $16 billion owed to foreign banks, about $4 billion falls due in the next three months, Interfax reported.


The Central Bank recommended that residents whose operations fall under the moratorium negotiate with creditors to review and agree on a payment schedule. "In such negotiations, Russian residents could act individually or form some sort of an association," the bank said, according to Interfax.


The Central Bank also clarified the terms of the moratorium in a statement Tuesday, saying the hard currency debts being put on hold included syndicated loans, so-called repo agreements, bank forwards and futures.


The moratorium does not, however, extend to Russian sovereign debt, regional Eurobonds, Vneshekonombank's obligations on servicing Russia's foreign debt or payments on European Bank for Reconstruction and Development loans, the bank said.


It was not immediately clear if corporate debts would be affected.


The government is hoping that the moratorium will give banks some breathing room on debt repayments at a time when they are facing a liquidity crisis. The move also restricts demand for hard currency, easing pressure on the ruble.


But the devaluation of the ruble could lead to the collapse of the banking industry if panicky Russians start closing their ruble deposits to buy dollars, analysts said. So the government moved in to protect banks by ordering the moratorium.


"What the government has done is ... let [the ruble] change more quickly than was good for the banking system, but [it] has taken other measures to prevent the system from collapsing," Richard Hainsworth, analyst at Thomson BankWatch, was quoted by Reuters as saying.


The measures under the moratorium aim to counterbalance the liquidity crunch that set in once the interbank foreign currency and credit markets ground to a halt and the Central Bank stopped banks buying dollars for its own account.


A debt moratorium is generally considered undesirable, but to save the banking system, analysts said the government had no alternative but to postpone repayments.


Inna Francis, a strategist at United Financial Group, said the government is trying to protect banks that have a solid retail client base. For example, the Central Bank last week extended a credit to SBS Agro, which has a substantial retail network. Itar-Tass reported the credit was worth $100 million.


However, the moratorium is seen as a blow to foreign confidence in Russian banks. International rating agency Standard & Poor's lowered Russia's currency credit rating from B minus to triple C, while Fitch IBCA downgraded the rating from BB minus to B minus.


"Any time the government causes a debt default, which is what this moratorium effectively amounts to ... is an indication of extreme financial distress," said David Beere, an London representative of Standard & Poor's.


"The effect is to prevent creditors from getting back their loans at the time they come due," he said.


Previous instances in Latin America show that moratoriums buy time for borrowers, but creditors usually fail to recover all their money because the hoped for economic recovery fails to materialize, Beere said.


The government showed its determination to help Russia's banking sector by giving its blessing to the creation of a 12-member bank club Monday that pledged to meet obligations to retail depositors and extend credits to each other.


But four of the banks in the club -- Alfa, Rossiisky Kredit, Inkombank and SBS-Agro -- were this week downgraded to a humiliating "Not Meaningful" by Standard & Poor's.