Russia Petrochemicals Report Q3 2009

BMI's latest Russia Petrochemicals Report highlights that the threat of a severe credit crisis arising from a potential systemic breakdown in Russia poses a major threat to the country's petrochemicals industry, with leading producer Sibur already cutting back capital expenditure (capex) and appealing to the government's lending bank for loans.

While it is already clear that Russia is headed for a recession, the risks of a systemic crisis are concurrently rising. Importantly, the only reason why the Russian banking system and corporate sector have not already faced a widespread default scenario akin to 1998 is because of the government's liberal injections of capital into the markets, thereby effectively taking on the short-term debt-refinancing obligations of large swathes of the private sector.

Sibur hopes to arrange up to US$2bn in international loans via the state lender Vneshekonombank (VEB) to fund its planned PVC and polymers plants. It plans to sign a US$1.44bn loan with VEB by mid- June 2009. Sibur says its liquidity position is improving. At the end of November 2008, its debts stood at RUB21bn. Without these loans, it will be unable to undertake its two major polymer expansion projects in Russia. These include a 500,000 tonnes per annum (tpa) polypropylene (PP) plant at Tobolsk city by Sibur subsidiary Tobolsk Polymer and a 330,000tpa polyvinyl chloride (PVC) complex in the Nizhny Novgorod region - planned with Solvay through their joint venture (JV) RusVinyl - which is scheduled to launch by 2012. The Tobolsk-Polymer PP project has met the requirements of international bodies including the International Financial Corporation (IFC), the World Bank and the European Bank for Reconstruction and Development (EBRD), paving the way to successful financing of the project by the VEB, including through attracting credits from foreign financial institutions. Meanwhile, in April 2009, Sibur announced that it would cut capex in response to a deterioration in the market. Although the group said that capex would be 'significantly lower' than the RUB40bn (US$1.2bn) spent in 2008, it did not give details.

The situation facing Sibur is indicative of the broader problems facing the petrochemicals industry and of Russian industrial producers as a whole, and BMI thinks it likely that several key projects will be delayed or even cancelled in the event of a systemic banking crisis. Much will depend on the government's ability to secure credit and shore up the sector with rapidly depleting reserves held by the central bank, the national wealth fund and the reserve fund, which have fallen by nearly 15%. Added to this is a bleak market outlook as the Russian economy looks set to contract by 4.0% in 2009.

Russia retains its commanding pole position in our petrochemicals rankings for Central and Eastern Europe (CEE), with a composite score of 59.6 points. Despite holding around a third of the combined polymer production capacity of the 10 countries surveyed, and providing the large bulk of regional cracker capacity expansion in the next five years, Russia lags behind EU states in terms of the structure of the economy, and has an average market risk score. The main weakness for investment in the petrochemicals sector is the absence of an industrial policy and a legislative framework aimed at overhauling the chemical sector. There is also a lack of foreign investment and its associated operational and management expertise, which could limit the prospects for growth.