Rules of the Game

Recovering from previous crises in Russia was easy: either you were still in business at the end or you were bankrupt. This time round the recovery is going to be much more difficult, as no major company has gone bust, but everyone has to restructure their debt.

Russia was a largely cash-based economy until about 2003, but over the last few years companies across the industrial gamut have borrowed heavily from banks eager to lend. "The last crisis was an earthquake and after an earthquake you can rebuild in a relatively benign environment. This crisis is the end of an economic cycle and even if the macroeconomic numbers improve, the bottom end of the real economy can't grow if there is a logjam of bad debt," says the CEO of HSBC's Russian subsidiary, Stuart Lawson. "But restructuring debt is a complicated process."

Russian bankers have never had to restructure debt before, at least not on this scale. And the size of the problem means bad has gone from being just a headache for bankers to becoming a systemic problem that must be fixed. Currently, non-performing loans account for about 5 percent of the bank sector's total loan portfolio, but others, such as the ratings agency Standard & Poor's, say the true figure for a broader defined "troubled debt" (which S&P's Ekaterina Trofimova argues gives a more accurate picture of banking woes) has the real number at a crushing 40 percent.

The trick is trying to get something back from a company that owes you money, but has run out of cash. "Any individual bank can choose to maximise its own value by aggressively using its available leverage to recoup debt, but you destroy economic value in the process. Plus you may win this time if you have an advantage over another creditor, but in the next case you may be the loser. Banks will come to see that it is in their best interests to cooperate," says Lawson.

London rules

Before coming to Russia, Lawson headed the restructuring unit of Citibank and was one of the pioneers of the "London rules" for debt restructuring. No one wants to see a debtor go bust; far better to get a failing firm back on its feet and allow it to repay its debt in full, albeit late. The trick is to get a diverse group of creditors to agree on a rescue plan.

The London rules, thrashed out in the 1980s in Europe, are a set of principles that creditors can follow that have proven to be effective. Players like Lawson are pushing to introduce a set of "Moscow rules" to help Russian banks salvage as much from the current bad debt mess.

Henk Paardekooper, Russian country manager of Royal Bank of Scotland, who is also advocating the introduction of Moscow rules, outlines the eight principles creditors need to adhere to. "The first step is to agree an extension for the debt and a 'stand still' of repayments to give the company some time to reorganise its resources," says Paardekooper.

Next, creditors need to suspend their claims and agree not to enforce their rights. At the same time, the company needs to agree to suspend its payments to debtors so no one creditor can siphon off what little money is left during the rescue. Creditors need to coordinate their actions by establishing a committee (which has no force in law) and this sets definite dates and goals, as well as sharing all available information about the health of the company – the "preservation" stage of the process, says Paardekooper. All these discussions must be secret if the credit committee is not going to wreck the companies chances of recovering. Finally, there's the "elevation" phase, which can mean lending the firm more money to get it back on its feet.

Moscow rules are still not widely spread, as most banks are still fighting to get back as much of their own cash as they can. Some, and Alfa Bank is the most widely cited example, have been very aggressive in recovering debt. However, the Russian government has picked up the idea thanks to the lobbying of people like Lawson and others, including Russian Finance Minister Alexei Kudrin, who has thrown his considerable weight behind the initiative.

Happily, it seems that things will be easier come the New Year. The chairman of the Central Bank of Russia, Sergei Ignatyev, said in November that overdue debt had peaked and might start falling in January 2010. "In late January, we'll get a new picture for overdue debt," he said. "Perhaps we'll register a fall."

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