Gazprom Leads Surge in Russian Debt Risk to Five-Month High

By Abigail Moses and Denis Maternovsky

Aug. 27 (Bloomberg) -- OAO Gazprom led a jump in the cost of protecting Russian companies from default to the highest in almost five months on investor concern the country's military incursion in Georgia will trigger a rise in borrowing costs.

Credit-default swaps on the world's largest natural-gas producer increased 37 basis points to 261 this month, and Moscow-based oil-pipeline operator OAO Transneft rose 28.5 to 260, according to at CMA Datavision prices at 2 p.m. in London. Contracts on Russia's government debt climbed 32 to 134, the highest since April 2.

The credit crisis has already prompted a jump in Russian corporate funding costs, with the nation's largest lender, OAO Sberbank, increasing rates on outstanding loans by an average of 2 percentage points last month. International investor concern over the Georgia military action may add at least a further 0.5 percentage point to annual interest payments, according to Mikhail Galkin, a fixed-income analyst at MDM Bank in Moscow.

``Access to capital for Russian corporations, already severely damaged by the global credit crunch, has further deteriorated on the back of increased political risks,'' Galkin said in an interview today.

Ten years ago, the Russian government shattered investor confidence by failing to repay ruble-denominated debt and devaluing the currency. The crisis triggered losses at Long-Term Capital Management LP that almost paralyzed the global financial system and prompted the Federal Reserve to organize a bailout of the Greenwich, Connecticut-based hedge fund.

`Irresponsible'

The U.S. and European Union yesterday condemned Russia's recognition of Georgia's two breakaway regions of South Ossetia and Abkhazia, which President George W. Bush said was ``irresponsible'' and ``inconsistent'' with United Nations Security Council resolutions.

Gazprom is seeking to borrow $500 million from international lenders after the Moscow-based company sold $500 million of five-year bonds in July. The company paid interest of 7.51 percent on the notes compared with 7.34 percent on $400 million of similar-maturity debt in April.

Transneft increased charges for shipping oil through its pipelines to cover higher financing costs, Vladimir Kushnarev, a vice president at the state-owned company, said in an interview with Russian newspaper Vedmosti this month. The Moscow-based company is seeking to refinance after Sberbank demanded as much as 12 percent annual interest on outstanding loans, the paper reported.

The cost of default protection on OAO VimpelCom, Russia's second-largest mobile-phone company, has also risen. Credit- default swaps on the Moscow-based company climbed 36 basis points this month to 391, CMA prices show. Contracts on VTB Group, the nation's second-biggest bank, increased 37.5 basis points to 353.5 since the start of August.

Default Protection

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates a deterioration in the perception of credit quality; a decline signals the opposite.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

The cost of default protection on European corporate debt also rose today with the benchmark Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increasing 6 basis points to 568, according to JPMorgan Chase & Co. prices. The Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 1.75 basis points to 102.

Credit-default swaps on the Markit CDX North America Investment Grade index, a benchmark gauge of credit risk linked to the bonds of 125 companies in the U.S. and Canada, increased 1 basis point to 144 basis points, CMA prices show.

To contact the reporters on this story: Abigail Moses in London Amoses5@bloomberg.net Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net