42 Billion Reasons Why Putin's Time May Be Running Out

Russian municipal bond risk is surging once again (at 6-week highs) heading towards crisis-levels as Bloomberg reports numerous regions (including Chukotka - across from Alaska, Belgorod -near Ukraine, and three North Caucus republics) are prompting concerns as debt-to-revenue levels top 100% (144% in the case of Chukotka).

Risk is on the rise once again...


The clock is ticking for President Vladimir Putin to defuse a situation he set off in 2012 with decrees to raise social spending. That contributed to a doubling in the debt load of Russia’s more than 80 regions to 2.4 trillion rubles ($42 billion) in the past five years and it all rolls within the next two to three years.


As Bloomberg details, threats to municipal finances are snowballing as sanctions over Ukraine choke access to capital markets, forcing local governments to fund social outlays with costlier bank loans.

While regional debt sales are down 53 percent so far this year, Moody’s Investors Service estimates borrowing will grow as much as 25 percent in 2015, driven by spending on health care, education and utilities.


The squeeze is putting regions in jeopardy. They’re facing "an increasing likelihood of defaults," S&P warned in June. At least one non-rated local government delayed a principal repayment on a bank loan in the first quarter, it said.


"A default by a large region could block market access for the Finance Ministry itself," said Karen Vartapetov, associate director of S&P’s Moscow office. "Right now the federal center has an opportunity to help regions. In three years, there may be fewer resources, while regional debt may be bigger, and that will result in greater risks."


Local administrations are running a 625 billion-ruble deficit, up 42 percent from 2014, according to S&P. Seventy-five regions had a budget gap last year, the Higher School of Economics in Moscow said in a May report.

Even The Russian Central Bank is nervous...

"Because of the high debt burden, access to market sources of financing may be partly closed for some regions," it said. "In addition, these regions may have difficulties with refinancing existing debt because banks are becoming more selective in assessing regional risk."

Charts: Bloomberg