The City fears Russia's default

MOSCOW. (RIA Novosti political commentator Andrei Fedyashin) - The first Russian-British financial consultations in early February in London will reveal what Russia can expect from European banks. Regrettably, Russia cannot hope for much.

It should not expect to receive loans because its credit ratings are falling, and without loans, its ratings will continue to fall - a vicious circle.

Experts in London's City are openly talking about a risk of Russia's default on foreign debts, although they do not think it will be as bad as in 1998. After all official speeches, Deputy Prime Minister and Finance Minister Alexei Kudrin had to persuade the City that Russia will not fall so low.

The City has never been particularly interested in the common destiny of its business partners (clients). It has always wanted to know what they are doing to return the money to it at a good interest rate, and what they can offer if they cannot do that in time.

Britain is not among Russia's top lenders, but the City has long become an international financial center, and understands well that apart from gas, oil, missiles, and a mysterious soul, Russia has yet another formidable weapon - foreign debts. Their power has increased tremendously against the backdrop of the world financial turmoil. In this context, the City was eager to see what Russia planned to do with them.

According to an estimate of the Economist Intelligence Unit, on January 31 Russia's total external debts amounted to $465 billion. On January 27, its international reserves were $427 billion (Kudrin quoted this figure in the City on February 4). British newspapers claim (quoting earlier figures and comparing credit payments) that these reserves have gone below $400 billion. This year alone, Russian banks and companies must pay debts and interest rates worth almost $140 billion, a sum close to the Central Bank's reserves. In any event, none of these figures look good.

On the eve of Kudrin's visit to London, the Fitch international rating agency downgraded Russia's credit rating from BBB+ to BBB. This is only two positions higher than "junk" status. With such a low rating, it is better not to request loans from foreign banks or international financial institutions because the interest rates will be exceedingly high. All financial leaders, such as the United States, Britain, France, and Germany have AAA ratings that are eight points higher than BBB. Fitch experts seriously suspect that Russia's reserves won't be enough to save all its banks and companies, which are over their ears in debt. All remaining funds will not provide Russia with a soft cushion if the crisis continues.

Credit default swap spreads (CDS) are falling particularly fast. Until recently, these financial instruments were not widely known, but they are now considered to be precise indicators of what is called the tolerance of credit risks. The London-based Daily Telegraph maintains that Russia's CDSs have risen to 1,123! This is more than Iceland's banks had before immediate bankruptcy and nationalization by the government. Iceland has been the hardest hit by the crisis.

The City is nervous for a reason. Its experts understand well that if Russia approaches default, and brings its "debt weapon" into action, everyone will be hit. They fear that Russian private banks and companies will start asking their creditors to refinance their debts, which would have been normal were it not for the current crisis and acute thirst for liquidity. Under the circumstances, such refinancing will become another heavy destabilizing blow to the world's financial market and the global banking system, and will only prolong the agony of the crisis.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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