By Vladimir Osakovsky, Head of Strategy and Research for UniCredit Securities
We expect Dubai World’s debt problems to be successfully resolved in the not-too-distant future. We think that all outstanding problems with maturing debt likely to be settled either through restructuring the debt, or through repayment from sovereign funds or possibly IMF assistance.
On Sunday, the UAE central bank stated it would consider supporting Dubai World and/or Nakheel creditors. A successful resolution of the crisis should mean the adverse effects of the news (outside the Emirates) prove short-lived and lead to a broad-based market rebound.
However, the longer those problems linger, the greater the danger to the Russian equity market’s 2009 gains. The Director General of the Emirate’s Department of Finance has said that the government does not guarantee Dubai World debt, and we believe this leaves open the door for a potential default by Dubai World or Nakheel. One potential implication of this could be a dramatic spike in global investor risk aversion, leading to considerable capital flight from all emerging markets, and Russia in particular.
Even in a worst-case scenario, we believe the adverse impact on the Russian economy is likely to be much smaller than seen in 4Q08-1Q09. The total exposure of Russian economy and market to outside capital is still lower than it was in 2008, according to our estimates, even despite the considerable correction of valuations since then. Moreover, we think that this time the Central Bank of Russia would be likely to allow a much sharper one-off correction of the exchange rate, which should minimize the impact of capital flight on local money markets and the broader economy.
We do not see a direct effect from the Dubai problems on Russian banks, as the latter are likely to have very little exposure to the city. Sberbank and VTB confirmed to us that they have no exposure.
The main negative implication is that our forecast of external debt markets reopening for both countries in 2010 might not come true. However, we have already seen what such a scenario looks like, and would not consider it disastrous. In 2009, Russian banks placed only approximately $2bn of Eurobonds and attracted $200m in syndicated loans, compared to around $8bn and $9.8bn in 2008.
The CBR successfully substituted for external funding sources this year. Although it has been scaling back its liquidity support recently, if needed, it could again become the country’s main financier, allowing for refinancing and sluggish industry growth. Kazakhstani banks would be in a more difficult situation, however, as the local government has limited resources.
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