Russia: The High Cost Of Easy Money
Credit Suisse First Boston should have spotted the red flags when Russian oil company Tatneft asked for a short-term loan last February. Oil prices were sinking fast. Tatneft was already saddled with $828 million in hard-currency debt, roughly equaling its 1997 export earnings. Worse, the company had admitted it was funneling loan money from foreign banks into the treasury of the Tatarstan regional government, which holds a controlling 32.4% stake in Tatneft. Even so, CSFB quickly approved a $220 million unsecured loan--one of many it offered Russian companies even as the country's finances deteriorated.
Now, Tatneft is buried under a pile of hard-currency debt and looking for a way out. After narrowly avoiding default in November on a $300 million Eurobond, the country's fourth-largest oil producer is deep in talks with CSFB and other creditors to restructure about $600 million in outstanding loans. Scores of other Russian companies are stuck in the same situation. Even if most creditors agree to restructuring, as seems likely, these companies will struggle for years making repayments on loans they should never have received.
BLIND EYE. The saga of Tatneft illuminates how Russian companies embarked on a disastrous borrowing spree--partly prodded by foreign bankers--in the months before the country's economic collapse. Fooled by a slight uptick in Russia's economy, foreign bankers bent their own rules on credit risk in the rush to forge client relationships in 1997. Many turned a blind eye as borrowers invested loan proceeds in risky Russian bonds or squandered the money on shaky investments. With easy money flooding in, Russian borrowers didn't worry about how to repay loans. "There was so much credit, the companies began to believe that they didn't need to behave well," says Stephen O'Sullivan, co-head of research at United Financial Group, a Moscow investment bank.
Indeed, the money kept coming even after Russia's stock and bond markets nosedived along with Asia's late last year. As weakening markets hampered their ability to raise capital, Russian companies increasingly turned to U.S., European, and Japanese banks. After boosting their foreign borrowing from $1.5 billion to more than $6.8 billion in 1997, the companies borrowed another $5.2 billion in the first eight months of this year, according to Loan Pricing Corp., a New York-based agency that tracks lending. Foreign bankers turned off the spigot in August after Russia devalued the ruble. But by then it was too late. "There's no chance of recovering our money," says a Western banker.
Only a year ago, Tatneft looked like one of Russia's most creditworthy companies. It had reliable hard-currency earnings, and it had brought in Price Waterhouse to bring its books up to U.S. accounting standards and U.S. consultants Miller & Lents Ltd. to audit its oil reserves. Profits in 1997 were $12.3 million on sales of $2.5 billion, up from 1996 when the company lost $290 million. Tatneft had been one of the first Russian companies to issue American depositary receipts, and its shares rose 242% in the first nine months of 1997, before slumping along with other Russian stocks.
EXPOSED LENDERS. Tatneft had started borrowing from the West in 1994, when Dresdner BaNk opened a $60 million line of credit secured by the companY's oil exports. The borrowing remained modest until 1997, when Tatneft took out $528 million in short-term loans from banks including Chase Manhattan Corp., Britain's West Merchant Bank, France's Societe Generale, and Germany's Berliner Bank and BHF-Bank. Tatneft says the loans were chiefly to finance equipment to boost the productivity of its wells. But the company was also handing over cash to the government of Tatarstan, a semiautonomous republic in Russia that runs its economy with a strong hand. Unable to raise money for a backlog of unpaid bills, Tatarstan made Tatneft its cash cow, taking at least $105 million from the company in 1997 and another $280 million so far this year, the company says.
Surprisingly, foreign lenders didn't seem overly concerned. When Chase Manhattan arranged two syndicated loans totalling more than $140 million in 1997, Tatneft in turn loaned more than half the proceeds to Tatarstan. Both loans were secured by Tatneft's export earnings, then about $800 million annually. Chase Manhattan says it wasn't told about the relending to Tatarstan and wouldn't have approved loans for that purpose. But Maxim Dyomin, financial adviser to Tatneft CEO Rinat Galeyev, says the company informed Chase Manhattan and other lenders, and they didn't object.
Industry analysts say Tatneft's re-lending was well known. A disgruntled officer at another Western bank that lent to Tatneft confirms that his bank knew about the practice before approving its loan, but says Tatneft didn't reveal the full extent of it until months later. "In retrospect, clearly we should not have lent to them," the banker says. "No amount of market share is worth that kind of risk." CSFB was one of the most exposed lenders because its loan was unsecured. The company declined to comment.
Tatneft has its own regrets. Since the August devaluation, the ruble cost of its hard-currency debts has more than doubled. The company's revenues are projected to fall at least 8% this year, to $2.3 billion, because of depressed oil prices. It also lost $65 million in Eurobond proceeds it had invested in Russian treasury bills before the government defaulted. "It was a mistake to borrow a huge amount of short-term debt. But we didn't know there would be such a change in the financial situation," Dyomin says.
Tatneft is still pumping oil, and it can use an estimated $571 million in hard-currency earnings this year to help pay off its debts. But the company is hurting. To raise cash to meet its $8.2 million monthly payroll, Tatneft now is issuing IOUs backed by crude-oil sTocks. On Oct. 29, the company missed a $13.5 million Eurobond coupon payment, but it scraped together the money before Nov. 20, when a default would have been triggered.
Foreign lenders were especially drawn to oil producers such as Tatneft because of their hard-currency earnings. But now, the oil companies are struggling to pay an estimated $1.1 billion in loan payments due by yearend, and bankers who once willingly rolled over their loans no longer want to do so. Russia's biggest oil company, Lukoil Holding, is one exception: It has not only kept up payments but is negotiating additional loans. Unlike Tatneft, Lukoil is not controlled by a localgovernment that could raid it for cash. And it is considered relatively transparent and well managed.
"USEFUL" EXPERIENCE. As Russia's indebted companies hunker down in talks with creditors, analysts are predicting Tatneft will win a restructuring deal that will pull it back from the brink. Analysts say that's because lenders don't want to trigger a default in which they'd have to battle other creditors to get paid. Financial adviser Dyomin promises if Tatneft secures such a deal, it will keep much tighter control of finances in the future. "In some ways, this experience may be useful for our company," he says.
But such promises will mean little as long as cash-strapped local authorities control the company. Foreign lenders may once have ignored what borrowers did with their money. They won't make the same mistake again. For those such as Tatneft, there may still be a long hard climb up the learning curve.