Moscow needs more reforms

The Guardian

Jason Corcoran - Friday October 3, 2008

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Russia may have plentiful foreign currency reserves, but it is one of the biggest losers from the credit crunch

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Invstor panic following Russia's default on its sovereign debt in 1998 led to a stampede by foreign investors to Moscow's Sheremetyevo airport and ultimately delayed the country's integration into the global economy.

Wind the clocks forward a decade and Russia is again in the grips of a deepening financial crisis precipitated by the US banking collapse.

Ten years ago, millions of Russians had their savings wiped out and many of the leading banks disappeared. The government fell on its sword, accepted culpability and went cap in hand to the International Monetary Fund and World Bank.

Today, there are no queues around the block to empty deposit accounts and life is carrying on per usual, apart from grumbles about rising inflation hitting the cost of bread and other staples.

The government is in a different position too as it squats upon $574bn (£325bn) of foreign currency reserves and $175bn in two oil stabilization funds.

Yet Russia has been one of the biggest losers in global markets this summer with stock indices tumbling by over 50% and capital flight leading to an exodus of $57bn since August 8. A rapidly deteriorating financing environment is now showing signs of pricking Moscow's hot property bubble.

This frustration led prime minister Putin on Wednesday to blame US "irresponsibility" for failing to deal with the financial crisis affecting the global economy.

Putin is partly right pinning the blame on the US but can't attribute all of his country's economic woes to the captains of Wall Street. Russian markets have been pistol-whipped by the international credit crisis but also domestically by its five-day war in Georgia, Russo-centric
corpoate flare-ups and Putin's own allegations of price-fixing at miner Mechel.

Putin's outburst at a cabinet meeting reflects the frustration of Russian businessmen who see a disconnect between the financial markets and the fundamentals.

Russia has a growth rate of 7.6%, a huge current account surplus, a budget surplus from high commodity prices and a booming consumer sector.

Yet domestic stock markets have spiralled downwards and lurched wildly out of synch with global trends. The regulator has had to step in three times during the past fortnight to suspend trading on both Moscow's exchanges.

Putin has responded to the crisis by pledging $150bn of funds to shore up confidence in the banks while the central bank said it would provide loans without collateral.

The credit squeeze has already led Russia's largest broker Renaissance Capital to sell 50% of its shares to billionaire oligarch Mikhail Prokhorov while KIT Finance has ended up in the clutches of Leader, energy giant Gazprom's pension fund manager.

More emergency sales and collapses are likely but a systemic failure of 1998 proportions is out of the question.

While the credibility of transforming Moscow into a financial hub to rival London, New York or Frankfurt has been dented by recent trials and tribulations, it could provide the wake-up call for wholesale reform of institutions and pensions needed to match that ambition.

http://www.guardian.co.uk/commentisfree/2008/oct/03/russia.creditcrunch?showallcomments=true

Selected comments

MartynInEurope
Oct 03 08, 3:12pm
Things are naturally in a state of flux, but significant changes were always gong to be necessary, and I think the likes of Medvedev and Putin probably acknowledge that fact.


Clip | Link andrewwiseman
Oct 03 08, 3:41pm
"One of the biggest losers from the credit crunch"

"Russia has a growth rate of 7.6%, a huge current account surplus, a budget surplus from high commodity prices and a booming consumer sector."

We should have their problems.

Still, their tanks are probably made of cardboard, right?

Infusoria
Oct 03 08, 5:04pm
Some Russia's problems probably come from trying to copy verbatim rotten western financial institutions and procedures, like stock exchanges and banking. The less Russians participate in stupid Western gambling games and schemes the better it is for Russia, I think. But Russian state development programs look pretty solid at the moment. If things going according to their plans, by 2020 Russia is going to catch up with or overtake EU/US in most areas and improve its infrastructures dramatically. At the same time the West might be getting sucked into a black hole of its own creation (with or without the collider) ;-)

BeatonTheDonis
Oct 03 08, 5:21pm
"While the credibility of transforming Moscow into a financial hub to rival London, New York or Frankfurt has been dented by recent trials and tribulations, it could provide the wake-up call for wholesale reform of institutions and pensions needed to match that ambition."

Yeah, maybe they should go for wholesale deregulation and the mass securitisation of dodgy loans like we did.

It's worked a real treat and has only cost the American tax payer $1trillion, with another $1trillion on the way, and the UK taxpayer £350bn, so far.

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Clip | Link UralMan
Oct 03 08, 5:41pm
I would not pay attention to the stock market in the short term. On a larger scale, the Russian market does not look terribly bad, compared, say, to the US. As of now, the Dow Jones trades at 10700. The first time it crossed this level was in April 1999, nearly 10 years ago. The Russian main stock index (RTS$) finished today at 1070, the fist time it reached this level on its way up was in December 2005. Sure, it fell more from its top recently and is more volatile than Dow Jones, but that what you would expect from an emerging market, wouldn't you? Especially for such an overheat economy as Russian one. By the way, about the stock market fall: the RTS$ fell by 57% from its top. Incidentally, the Chinese main stock market fell by nearly 70% from its top. Inconveniently for the author, China has not been involved in any war that can be blamed on :-)

There is very good technical reason for the market collapse in Russia. Practically all the entities in Russia have been borrowing money from banks on a short term notice by pledging shares as collateral. They did not bother thinking of saving money for repaying these loans as, having used to the idea that shares can only go up, meant to sell their collateral at higher prices to repay the loans. Once the market went downturn and banks started to call the borrowers (since the value of collateral in their coffers dropped), the latter started scratching around for cash at any cost, selling any shares they had, further accelerating the fall. The market caught itself in a vicious circle. Everybody knows that the share "A" is intrinsically worth at least $100, but the holder is dumping it at $10 not because he thinks that the company is bad, but because he must repay money to the credit right now. In short, the free market is at work. The initial trigger for this is the loss of confidence in the banking sector and is, indeed, originated from the US. I bet, people in Britain witnessing nationalisation of their banks have similar view. So, do not blame Putin for that.

When it will stop? Who knows. If I knew such things, I would long be the owner of Guardian (I like this paper) rather then its reader. But, what I do know, is that once the technicality sorts itself out and the panic is over, the Russian market will quickly rebound, as many companies remain fundamentally very strong and have net assets well in excess of the value suggested by the shares. And when it happens, I would be extremely interested to read what Jason Corcoran's explanation for that would be :-)