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. Last Updated: 07/27/2016

Moscow, Regions Struggling to Avoid Default

International rating agencies warned this week that Russia's regions, including Moscow, are fighting an uphill battle to avoid defaults on foreign debts.

"All Russian rated regions currently have negative outlooks at very low rating levels, which signals significant risks for all regional borrowers," said Monica Richter, director with Standard & Poor's rating agency in London.

Out of eight Russian regions publicly rated by Standard & Poor's, three of them - Nizhny Novgorod, Sverdlovsk and Tatarstan - have defaulted on unrated debt over the past year.

The City of Moscow managed to escape default this week, restructuring the remaining $102 million of a $200 million syndicated loan arranged by Deutsche Bank, West LB and Soci?t? G?n?rale in 1997.

The loan's original maturity date was in the year 2000, but creditors had exercised a put last year to force the Moscow government to pay $98 million, said Sergei Zakharov, deputy head of the hard currency department at City Hall.

The creditors then attempted to exercise a second put option this month. The move caught City Hall very much off guard, and Moscow was only able to scrape together some $31.3 million for payment of interest and principal.

Under the restructuring deal agreed after Moscow notified creditors that it could not possibly pay the remaining $75 million in principal plus accrued interest, the city will now pay off the loan in four quarterly installments by March 31, 2000. The original due date was June 18, 2000.

While the deal means that Moscow has avoided default, along with all the nasty side effects that could bring, such as cross-default provisions in other credits and the general embarrassment factor for Moscow Mayor Yury Luzhkov, it also shows that the city's creditors lack confidence in its ability to go on servicing all of its debts.

"The restructuring scheme indicates the creditors' desire to receive their money back before the Eurobond principal payment," rating agency Fitch IBCA said in a press release issued Thursday.

Moscow is due to pay a massive $500 million in principal on its Eurobonds on May 31, 2000.

It is far from clear how City Hall will pay that $500 million, which comes due just two weeks before a presidential election is scheduled in which Luzhkov is expected to take part.

Luzhkov has at least been able to reschedule the Moscow mayoral elections, which were originally due to take place the same day as the presidential ones.

"I think it was a prudent step on Luzhkov's part to bring the elections up to December 1999 since, if re-elected, some stability and continuity of policy is ensured until the next question mark arises with the presidential election," said Richter of Standard & Poor's.

However, City Hall faces plenty of payouts during the course of this year, when it must cough up some $300 million to service its debts.

Fitch IBCA expressed concern over the fact that the Moscow budget did not allow sufficient funds to cover all of its 1999 foreign debt obligations.

Although some $471 million was due to mature over the full course of 1999 - $170 million of which has been paid - the city budget for this year allocated only $443 million to fund such payments. And the $471 million did not include any allowance for put options on syndicated loans.

With several Eurobond payments still to come this year - payments to which Moscow will likely give top priority - City Hall may well already be attempting to restructure some of its commercial loans, Fitch IBCA said.

It could also start to experience some serious problems in trying to subsidize some of Luzhkov's favorite industrial and construction projects, analysts said.

However, it may well be about to get a helping hand with its domestic obligations from the state savings bank, Sberbank. Moscow is set to borrow 2.5 billion rubles ($10 million) until year end to pay maturing municipal bonds, Reuters reported this week.

Meanwhile, if mighty Moscow is struggling to keep up with its admittedly gargantuan foreign debts, the regions could fare even worse, analysts said.

Tatarstan is already well and truly behind the 8-ball, having defaulted on an unrated $100 million loan that had fallen due last October. To add to the embarrassment, that loan had already been restructured.

Furthermore, the republic's pet auto works, the KamAZ truck plant, has failed to pay back a $100 million loan from the European Bank for Reconstruction and Development that fell due in January of this year.

The Leningrad region also came perilously close last month to defaulting on a $50 million syndicated loan. Again, the region's creditors called in the loan through a put option and caught the administration with its pants down.

In the end the Leningrad government managed to restructure the loan and to scrape together about $2.5 million for an interest payment that it had failed to pay by the due date.

The St. Petersburg government looks to be one of the few regions to have its fiscal affairs comparatively in order after paying a semi-annual $14.2 million Eurobond coupon on Thursday. Furthermore, the $300 million principal on the bond - which was used mostly to restructure municipal debt - comes due only in 2002.



Standard & Poor's Public Finance Ratings

Nizhny Novgorod SD*

Sverdlovsk SD

Tatarstan SD

Moscow CCC-

St. Petersburg CCC-

Irkutsk CCC-

Samara CCC-

Yamalo-Nenets CCC-

*selective default

Source: Standard & Poor's