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. Last Updated: 07/27/2016

Slipping Oil Revenues Rekindle Debt Fears

LONDON -- Tumbling oil prices have revived fears over Russia's 2003 debt-servicing spike, threatening its status as a safe haven for emerging-market investors worried about war and recession, analysts said Friday.

But with few liquid assets available in the safer markets, and Poland, the most liquid eastern European sovereign, also in trouble, investors lack viable alternatives.

"Russia is probably still perceived as the best structural reform story in the emerging markets," said Zsolt Papp, emerging-market debt strategist at ABN Amro Bank in London. "Nobody is questioning their ability to service debt in 2002, but with low oil prices, their budget plans look more and more stretched."

ABN Amro estimates that Russia needs to make $13.6 billion in payments in 2002, but this steps up to $18.2 billion in 2003. The government had planned to save extra revenues from oil exports in a macro-stabilization fund in order to tackle this debt-service hump.

According to analysts, each dollar of the oil price is worth $1.5 billion in export proceeds for Russia. Oil is between 34 percent and 51 percent of Russian exports, according to research published by J.P. Morgan.

Oil prices rose last week as traders worried about supply risks posed by possible U.S. retaliation against Middle Eastern targets following the Sept. 11 attacks. Prices have stumbled this week, however, as concern that the attacks may tip the world economy into recession have come to the fore. Benchmark November Brent oil futures were at $23.22 per barrel Friday, down from a high of $29.43 per barrel Sept. 14.

"[Russia is] not immediately in difficulty, but if we are in a long period of global market difficulty, then perhaps they don't look as good as they did," said Tim Ash, emerging-market bond strategist at Bear Stearns International.

Russia's benchmark 2030 dollar bond sank to 44.750 percent of face value Wednesday, a level last seen in early August, when the entire emerging-debt market was feeling the pressure of Argentina's domestic liquidity crisis.

Meanwhile, Polish debt is suffering due to political uncertainty and macro-economic woes. Poland's segment of the J.P. Morgan Emerging Market Bond Index Plus, the industry benchmark, was yielding 253 basis points over U.S. Treasuries on Friday, 28 basis points more from the start of the month and 56 basis points more from two months ago.

"Poland should be a safe haven, but there are question marks behind the elections and domestic issues," said ABN's Papp.

Volatility in Russian and Polish assets means there is a shortage of defensive options for investors who want to stay within emerging markets. "We are basically left with Hungary and Slovenia. The Czech Republic would be another safe haven, but they have no external debt," said ABN's Papp.

Even older debt issued by Hungary and Slovenia could be hard to get a hold of, he added, as the institutions that bought the bonds when they were first priced have largely taken profits and sold their debt on to retail buyers.

"I still think the Baltic states are good names," said a trader at a Frankfurt bank, although he said current market jitters might discourage borrowers from bringing scheduled deals to market.

Latvia and Estonia had each been expected to launch bonds in September.