Streetwise Professor

March 12, 2014

Go Ahead, Make My Day: Here’s a Russian Bluff That’s Easily Called

Filed under: Commodities,Economics,Energy,Politics — The Professor @ 10:32 am

Russian government officials and Duma members  have threatened that if the US and/or EU impose financial sanctions in response to Crimea/Ukraine, Russian corporates will just default on their debt:

A Kremlin aide warned last week that Moscow might refuse to pay off loans to U.S. banks as a retaliation measure against sanctions.

Mikhail Yemelianov from pro-Kremlin party A Just Russia went even further: “If they (the West) freeze our assets, then our companies could stop paying foreign debts. The Russian corporate debt exceeds $700 billion”.


Banks don’t lend to Russia in large sums on an unsecured basis.  One of the things that caused Putin to freak out in 2008-2009 was that Russian companies (notably Deripaska’s Rusal) had pledged stock as collateral against loans.  Putin got Russian government banks (Sberbank, VTB) to extend credit to these companies so they could pay off the loans to western banks, thereby preventing them from defaulting and having large blocks of shares pass out of Russian hands.

I don’t know about all $700 billion of Russian debt, but I do know a bit about loans to one company mentioned in the linked article: Rosneft.

Rosneft borrowed upwards of $10 billion to finance the TNK-BP acquisition.  The structure of the borrowing shows just how dodgy even the biggest, most politically connected, state enterprises are viewed by western banks.

The loans were structured as prepays, and included trading firms Glencore, Vitol, and Trafigura as part of the structures.  Rosneft entered into off-take agreements with the trading firms that obligate the Russian company to deliver oil to them over the next several years.  The trading firms will then sell the oil, and send the receipts from the sales to the lending banks, thereby paying off the loans.  That is, the banks do not trust Rosneft to pay.  Rosneft never touches the money from the oil sales.   It goes from the trading companies directly to the banks.

In other words, Rosneft’s oil is security for the loans.  And as I noted when the deals were done, real supermajors (as opposed to pretend ones) don’t have to pledge such security in order to borrow.

So what would happen if Rosneft carries through on Yemelianov’s threat?

The only way to do that would be to default on the off-take agreements, i.e.,  to fail to deliver the contracted volumes to  Vitol et al.

Good luck with that.  The second Rosneft fails to deliver on the off-takes, and tries to sell  cargoes pledged to the trading companies on the open market, the trading companies will take legal measures to seize those cargoes to enforce their legal rights.  Knowing that, no buyer in his right mind will contract with Rosneft once it has stiffed Vitol, Glencore, and Traf.  Meaning that Rosneft cannot just walk away from its debt, if it ever wants to export a barrel of oil ever again.

In Rosneft’s case, therefore, the threat to walk away is an empty one.  The banks and trading companies have seen to that in the way the deals are structured.  Precisely because they don’t trust Russian companies enough to lend on an unsecured basis.

I don’t know the structure of every loan provided by western banks to Russian corporates.  But the structure of the Rosneft loans tells you that the banks have zero trust with Russian companies, and demand some form of security against the credit extended: the form of security will vary by the borrower and type of loan.  Meaning that Russian corporates that attempt to retaliate against sanctions by defaulting on obligations to western creditors will suffer major, major pain.

So I say: call the Russians’ bluff.  Impose sanctions.  If Putin forces Russian companies to default in response, they-and he-will pay a far higher cost than anything inflicted on the nations sanctioning Russia.

Print Friendly, PDF & Email


  1. I am dying to learn how these commodity traders are responding to the copper collapse…courtesy of unwinding of Chinese financing trades…apparently a scrap copper trader in US is facing large losses after a Chinese letter of credit was not “honored”

    Comment by Surya — March 12, 2014 @ 11:00 am

  2. Why can’t Rosneft sell the oil to a Russian, Belarusian, Chinese, etc. company in a location in which courts will not enforce the contract with Glencore etc.? Then this middle man sells the oil to world markets.

    Collateral is only really worth it in full if the lender is in possession of the collateral, or can take possession of the collateral in an efficient way.

    Comment by ptuomov — March 12, 2014 @ 1:07 pm

  3. The Chinese would not do that, IMO. Moreover, Rosneft supplies a lot to Europe. And believe me, having learned from the master (Marc Rich) don’t think that Glencore and Trafigura aren’t wise to all the shell games. Rosneft would have a very difficult time selling appreciable quantities of seaborne oil.

    And think of what it would mean that the world’s largest oil company (by production and reserves) would have to resort to smuggling on a grand scale.

    The ProfessorComment by The Professor — March 12, 2014 @ 3:34 pm

  4. > Russian government officials and Duma members have threatened that if the US and/or EU impose financial sanctions in response to Crimea/Ukraine, Russian corporates will just default on their debt

    Well, defaulting on loans is in some ways a more dignified thing than what the US government will do with the $17 trillion debt, and snowballing every day. Repaying such a sum is as impossible as for a pauper to buy a controlling packet in Facebook shares. But instead of defaulting, the US treasury will just print $17 trillion in paper dollars and repay its debt with it. This will, of course, devalue the dollar by a factor of 10 or 20 and will destroy the lives of all the people who have dollar savings, and nobody will lend to the US again, but the debt will be repaid.

    Comment by vladislav — March 12, 2014 @ 8:48 pm

  5. I always thought the governments of these tin-pot regimes that grew up on a diet of Communist bullshit and strong-arm politics have no idea how the western legal and commercial systems work. I remember when ExxonMobil managed to get $12bn of PDVSA’s overseas assets frozen in advance of a claim, and the Venezuelans went apeshit having been found to be miles out of their depth. Strong-arm tactics only work if you don’t have to interact with normal people, and I don’t think the Russians have figured this out yet.

    Comment by Tim Newman — March 13, 2014 @ 3:13 am

  6. “And think of what it would mean that the world’s largest oil company (by production and reserves) would have to resort to smuggling on a grand scale.”

    It would mean business as usual, as it is in China, Iran, Indonesia, Venezuela, etc. There’s a fully built global infrastructure to trade smuggled oil and gasoline. All the countries that subsidize domestic gasoline are leaking it out. The Chinese are buying.

    Likely the banks are on the hook to make the trading firms whole if Russian companies fail to deliver. Is this the case? If it is the case, then I wouldn’t be surprised to have Glencore etc. affiliates actively facilitating the laundering, smugling, and selling of the Russian oil! 😉

    In contrast, smuggling natural gas and selling it on a black market is nearly impossible.

    Comment by ptuomov — March 13, 2014 @ 8:00 am

  7. One interesting fact, Vladislav and So? consider the government in Kiev “illegitimate” or “unconstitutional” as does their hero Putin.

    But it needs to be noted that the current separatist leader in Crimea was installed by Russian soldiers after the PM of the autonomous region was forced to resign at gun point.

    The current ruler of Crimea only garnered 4% support in the last regional elections to the parliament.

    More Russian hypocrisy.

    Comment by Andrew — March 14, 2014 @ 12:09 am

  8. Libor cases are back…FDIC is now in action. Given this is a govt. agency, will they have a better chance against justice Buchwald ?

    Comment by Surya — March 15, 2014 @ 8:55 am

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress