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Providing a detailed view from within, LeapRate’s Russian Editor Maria Nikolova looks at the leveling effects that sweeping ruble inflation and high interest rates can have on debt incurred by large conglomerates.
It is perhaps a sweeping generalization to state that everything is big in Russia, although there are several examples of enormitude in the world’s largest nation by area, ranging from Moscow traffic jams to the volume of Tolstoy’s literary works. I personally felt this in the summer of 1995, when the hyperinflation has lost some force but the cost of living was still rather high. I remember being asked to pay RUB 3,000 for a plastic cup. Back then, I had no idea who would benefit from such high prices, except the sellers of plastic cups.
Last week played host to a plethora of headlines about the ruble slump and the damage the high key interest rates would inflict upon Russia’s economy as a whole. To me, the whole thing raised the “plastic cup question”.
Who benefits from interest rates being so high and the Ruble being so low? Quite simply, Mechel.
Mechel is a heavy engineering giant, with its business including coal mines, steel production plants and even sea ports. The company employs about 70,000 people currently and is on the verge of bankruptcy.
In terms of economic factors, it is very simple to decipher what saves heavily indebted Mechel every time it comes close to actual default, and that is a hike in key interest rates and the resulting fall in the ruble against the US dollar.
December started on a low note for the company, taking it close to bankruptcy again, as it lost a lawsuit against one of its creditors – VTB, and was asked to urgently repay RUB 3 billion to the bank. The company also reported widening losses for the first nine months of 2014, and Moody’s assigned limited default (LD) designation to Mechel’s probability of default rating (PDR).
Moody’s downgrade was announced on December 15, 2014. That added to the pressure on the company’s shares that were already approaching zero. But as the demise looked imminent, the Bank of Russia raised the key interest rates. The ruble took a dive. Mechel’s share prices rose.
Why was that?
The major part of Mechel’s debts is denominated in RUB. As the ruble plunges, the debts plunge too. Let’s put some figures on it. The company owes Gazprombank RUB 26.8 billion and USD 1.4 billion; it owes Sberbank RUB 61.8 billion and EUR 29 million; the debts to VTB amount to RUB 53.7 billion and USD 100 million.
When the ruble plunged after the move in rates, the debts fell accordingly. Additionally, Mechel had the right to offer its shares on discretionary auctions, thus defending itself from selling its shares at the close-to-zero prices. Mechel made use of those discretionary auctions on the Moscow Exchange on December 19th.
No one wants Mechel to go bankrupt. Not because of the potential loss of employment that could blight the company’s 70,000 employees, but because some of the biggest banks in the country will be left without their loans repaid. Mechel’s astute accountants are all to aware of a solution which could end the company’s woes, and wants to convert all of its debts into rubles. This way the next ruble slump will solve all of its credit problems.
So here is a piece of advice from the owner of a plastic cup that costs RUB 3,000. Next time you’re wondering whether the Bank of Russia will raise the rates, check out Mechel’s share prices. If they are low, the company would love a ruble drop. What’s not to love about high interest rates?
Source: Mechel Corporation.