By Ambrose Evans-Pritchard, Telegraph, UK | 17 November 2008
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Shoppers in downtown Moscow Photo: AP
A fifth of the Kremlin’s fire-fighting fund has gone before the economic crisis even starts. Would the Medvedev-Putin duo have provoked the West so nonchalantly had they known that global recession would soon cut the price of Urals crude oil to $49.35 a barrel, knocking away the chief prop of Kremlin finance and Russian power? The pace of capital flight quickened last week to $16bn after a botched mini-devaluation by the central bank.
Tinkering with currency bands is hazardous in a country where memories of the 1998 savings wipeout are still fresh. The Kremlin already faces a run on Russia’s banks as depositors rush to switch their roubles into dollars, despite the $200bn financial rescue package. Russia’s Globex bank suspended withdrawals by depositors on Wednesday. Kommersant newspaper reports that the deposit loss from rouble accounts reached 54% at Sobinbank in October, 27% at Globex, 25% at Raiffeisenbank, 24% at Unicredit, and 22% at Alfa.
"The deposit run has intensified to dramatic levels. The government’s attempts to slow panic migration to foreign currencies has failed," said Marina Vlasenko, from Commerzbank. The central bank is caught in a fixed exchange rate trap. Pegs create the illusion of currency stability just long enough to lull everybody into a false sense of security (note Greece and Spain inside EMU). Russia either burns reserves propping up the rouble, or it risks a self-feeding devaluation spiral.
There is a third way, of course. Premier Vladimir Putin issued a veiled threat on Monday to impose capital controls. Money flows out of the country would be strictly monitored, and "corporate egotism, any kind of corruption or abuse" would not be tolerated. Yes, he also said that "legal movement of capital overseas is a civilized financial transaction. There is no question of any state bans". Take your pick.
The cost of insuring against Kremlin default tells us that somebody is worried. Credit default swaps (CDS) on Russia’s debt traded at 827 last week, higher than Hungary’s debt (605) before it secured an IMF rescue. Gazprom debt was off the charts at 1155.
CDS contracts can overstate a case. But investors have rediscovered that the Russia story— stripped of BRIC’s happy talk— is still not much more than a leveraged play on oil and gas. Commodities made up 85% of export revenues at bubble peak in May, just before the RTS index on Moscow’s bourse began its 73% crash. A trillion dollars of paper wealth has vanished.
The government’ spending plan for 2009-2011 is based on a Urals oil price of $95. Finance minister Alexei Kudrin said the state would dip into its Reserve Fund (now 8.2% of GDP) to cover any shortfall. This is not a strategy that can survive the global slump we face next year. The Kremlin lives off energy taxes. It has no other income to speak of. The domestic bond market is tiny.
That is why it had to order oil companies last week to renew export shipments. They were selling at near $10 a barrel in the domestic market because crude prices have fallen to a level that no longer makes it rational to sell abroad given the state’s $40 export tariff. Russia must soon choose: either bleed its oil industry to death, or slash spending and face street riots. It is already mobilizing the apparatus of coercion. The Moscow Times bravely ran the headline "Police get orders to crush crisis unrest".
Interior minister Rashid Nurgaliyev said: "Anti-crisis groups are to be set up in the regions to intercept any early indications of destabilization." Marie Mendras, a Russia advisor to French president Nicolas Sarkozy, said the Kremlin is responding the only way it knows how. "The Putin regime is politically closed, won’t listen, and is incapable of adapting to this sort of financial crisis, so they are resorting to repression," she told a Russia Foundation meeting.
Will Russia go bankrupt again? Unlikely, said Charles Robertson, a strategist at ING. Foreign debt— at both state and private companies— was 10 times reserves before the 1998 default: it is roughly equal this time. While oligarchs and state firms have built up $500bn of dollar and euro liabilities, the volume of short-term loans that must be rolled over within 12 months is modest compared to the Asian and Latin American crises of recent years. The money supply in the banking system is a super-low 1.2 times foreign reserves.
"Today Russia is one of the safest countries in the world. We are aware of no case in history of a significant collapse in the currency with ratios this low," he said. The price of oil will not stay low enough for long enough to destroy the system as it destroyed the Soviet Union in the 1980s. The International Energy Agency warned last week that the world’s oil fields were depleting at an alarming rate. "We will require four new Saudi Arabias by 2030 to meet demand."
The inevitable energy rebound will bail out Russia again, but not enough to restore the country to superpower status soon, if ever. "Does Russia really have energy power?" asked Professor Alan Riley, from City University. "The giant gas fields are running down. Russia must turn to the High North where reserves are 560 kilometers into the Arctic, 360 meters down, and very expensive to extract. This is by an incompetent Russia with a Soviet-style gas system that has not made the investments needed," he said.
Somewhere between yesterday’s inflated talk of Russian riches and today’s talk of Russian bankruptcy lies the banal reality of a mid-ranking nation, run by a dysfunctional elite, with the worst aging crisis in the Western world, that happens to be sitting on a lot of resources.
As the adage goes: Russia is never as strong as she looks; Russia is never as weak as she looks.
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Russia Lifts Rates To 12% To Save Rouble As Crisis Deepens
By Ambrose Evans-Pritchard, Telegraph, UK | 12 November 2008
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The surprise move last night came after the authorities had spent $7bn of foreign reserves in a matter of hours trying to defend the currency, at a lower level. The central bank has now spent $84bn of its reserves over the last month. "The devaluation has begun," said Lars Christensen, Russia strategist at Danske Bank.
"The rouble has fallen out of its basket against the euro and the dollar. Russia is facing a serious confidence crisis and this could set off a self-fulfilling panic. What is clear is that economy is slowing drastically."
Chris Weafer, strategist at UralSib, said there were echoes of the 1998 crisis. "If people lose confidence, we could have a massive run on the banks as we saw twice in the nineties: then the game is up," he told Bloomberg. Russia is battening down the hatches for a deep slump. It has downgraded its oil forecast to $50 a barrel next year, a level that will play havoc with the state finances.
Expecting trouble, the Kremlin has mobilised the police to crush dissent. "If anyone tries to exploit the financial crisis, the authorities should bring criminal charges. We don't want a return to the 1990s when everything was seething," said President Dmitry Medvedev. Interior Minister Rashid Nurgaliyev said "the mounting consequences of the world financial crisis could well have an unpredictable effect.
"Anti-crisis groups have been set up in the regions… to intercept any early indications of destabilization," he said. Donald Jensen, an adviser to the US government, told a Russia Foundation meeting yesterday that the credit crunch posed a grave threat to the Kremlin. "This is pushing the Putin regime towards a crisis. Salaries are being held back and factories are being shut down in major cities. The regime cannot address all the demands that it is faced with," he said.
The Moscow bourse was closed after the RTS index plunged 10%, down over 70% from its peak. Credit default swaps measuring bankruptcy risk on Russian debt jumped 150 basis points to 630 as foreign investors scrambled to hedge exposure. "There is massive deleveraging going on in Russia on all fronts," said Luis Costa, an economist at Commerzbank.
Mr Costa said the oil slide had led to an abrupt change in the fortunes of Russia, which relies on commodities for 80% of its foreign earnings. "They are not going to have a current account surplus any longer. They could swing from plus 7% of GDP to minus 2% to 3% next year, which is quite a reversal," he said.
Any devaluation is a political risk given still fresh memories of the 1998 crisis, when many Russians lost their savings. The state-owned giant Sberbank has lost 2.5% of its deposits over the last month, while smaller lenders have suffered a classic bank run. Fitch Ratings downgraded twelve banks yesterday, warning of an "increased likelihood of a deterioration in the government's ability to provide support".
Russia still has the world's third biggest foreign reserves, but these have shrunk from $598bn to under $480bn due to capital flight since the Georgia war in August. Crucially, Russia's banks, oil producers, miners, and steel companies have amassed $510bn of foreign debt, mostly in short-term loans. Kingsmill Bond, from Russia's investment bank Troika Dialog, said the Kremlin has committed $280bn to shore up these companies.
While it still has some firepower left, it cannot weather a long slump in oil prices. If crude drops to around $50 a barrel, and stays there, the combined losses on Russia's current and capital accounts will reach $110bn a year. "We estimate that the rouble could drop by around 30%", he said.
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