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Bank Rossii Eases Further As Russia's Economy Contracts At A Record Rate

The ECB's Balance Sheet At A Glance.

Tuesday, October 7, 2008

Russia's Crisis Gathers Momentum

Russia's government plans to lend the country's biggest banks 950 billion rubles ($36 billion) for at least five years in an attempt to unfreeze credit markets, according to a new plan announced by President Dmitry Medvedev this morning. State-run OAO Sberbank and VTB Group, will get 500 billion rubles and 200 billion rubles respectively.

Some 450 billion roubles ($17.19 billion) of the 950 billion rouble subordinate loans package for banks will come from one of the National Wealth Funds according to Finance Minister Alexei Kudrin said on Tuesday. Russia's two oil wealth funds totalled $189.7 billion as of Oct. 1.

The Russian authorities, who are currently grappling with the worst financial crisis since the government's debt default in 1998, have already pledged more than $150 billion for banks and companies through loans and tax benefits (see details in this post here).

Stocks First Rise And Then Fall Back

Russian stocks rose following the announcement, and with OAO Sberbank and VTB Group leading the advance. OAO Rosneft, Russia's biggest oil producer, pared back some of yesterday's 24 percent decline after crude rose in New York. The Micex Index initially gained 5.7 percent to 794.48 at 2:12 p.m. in Moscow, after falling 19 percent yesterday. The dollar- denominated RTS Index climbed 4 percent to 900.60 after retreating 19 percent yesterday, the biggest slump since the index began in 1995.

However the good news was not to last long, and it seems the plan wasn't enough to convince investors the government can halt its worst financial crisis since 1998. On the day the Micex Index fell 4.5 percent to 717.83, after losing 19 percent yesterday, and closed at its lowest level since August 2005.

Share trading on Russia's bourses had earlier been suspended for a second day first thing this morning following yesterday's massive sell off. Russia's stock markets have now been halted nine times since Sept. 16. One indication of just how critical the situation is becoming is the fact that the MosPrime interbank rate - that is the rate that Russian banks charge to lend to each other - soared to 7.29 percent today from 4.75 percent at the end of last week.

Russia's oil and gas majors were all down, with Gazprom sinking 4.9 percent to 136.10 rubles. Rosneft falling 6.6 percent to 101.87 rubles, and Lukoil declining 5.3 percent to 1,047.90 rubles.

The price of oil, which has slipped 38 percent from a record $147.27 a barrel July 11, snapped a four-day decline this morning, rising 3 percent to $90.47 a barrel, and all the majors seem to have applied to the government for help with loans. Lukoil is seeking between $2 billion and $5 billion to refinance loans, but many other companies are also reported to be seeking government loans, including OAO Gazprom, OAO Rosneft, and TNK-BP, BP Plc's 50 percent Russian venture.

Fence Mending

Russia is urgently seeking to mend fences with the west after the damage done by the conflict in Georgia, amid fears that the country faces a suuden slowdwon followed by an extended period of stag­flation.

According to Igor Yurgens - former vice-president and executive secretary of the Russian Union of Industrialists & Entrepreneurs, and currently an adviser to Dmitry Medvedev - the Russian administration are trying their best to send signals of an improved business climate as Russia battles to restore investor confidence, which he recognises have been badly shaken by the cold war style rhetoric of recent weeks .

According to Yurgens - as quoted by the Financial Times this morning - both Dmitry Medvedev and Vladimir Putin understand the government needs to improve the climate for foreign and, mainly, Russian investors “who are sort of scared”. “A big financial crunch outside and a crisis of confidence and cold-warish kind of attitude inside was too much.”

Mr Yurgens told the FT that a slowdown in growth because “credit lines are closed” was inevitable with a fall of as much as 4 percentage points in GDP growth from the current 8 percent level. This provisional estimate of the growth rate at the end of 2008 seems realistic to me.

The head of a think tank advising the president, Igor Yurgens was pretty much a lone voice criticising Vladimir Putin this summer for his attack on Mechel, a coal and steel group, and his comments at the time was one of the factors which helped trigger the investor exodus due to concern over political risks.

The government’s reining in of its rhetoric “is visible and is being substantiated by some megadeals in the pipeline and signed, such as Eon Ruhrgas”, he said, referring to last week’s deal between Eon and Gazprom.

“You could feel a little bit of discontent with the hawkish rhetoric and you see the adjustment,” he said, adding that Mr Medvedev hoped to push ahead with cutting back bureaucracy and stimulating growth in the oil ­sector via tax incentives. I guess we can consider this mornings reported decision of the Russian authorities to extend a 4 billion-euro ($5.43 billion) loan to Iceland to be the kind of pacificatory measure Yurgens has in mind.

Meanwhile Andrei Sharonov, managing director of Troika Dialog, the Russia's oldest investment bank, warned yesterday that the country was "quite vulnerable" to the global credit crisis and with retailers and developers being particularly at risk, while Bloomberg cite Gulzhan Moldazhanova, chief executive officer of Basic Element, the investment group of Russia's richest man, Oleg Deripaska, to the effect that Russian retailers are currently being offered credit with an interest rate of up to 35 percent.

``There are two main consequences for Russia, a lack of confidence and a lack of liquidity,'' Sharonov, a deputy economy minister until resigning in July last year, said in a Bloomberg Television interview in Moscow. ``This problem is not only for financial institutions, but for the whole of industry, for the whole economy. Many companies feel these problems with debt financing.''

Russia's ruble fell for the eighth consecutive day yesterday, and hit its weakest level in 18 months against the dollar at 26.2043. The extra yield investors demand to own developing-nation bonds instead of U.S. Treasuries swelled 48 basis points, or 0.48 percentage point, to a four-year high of 4.85 percentage points, according to the JPMorgan Chase & Co EMBI+ index.

The cost of protecting bonds sold by Russia's government jumped the most in three weeks, rising 26 basis points to 290, according to CMA Datavision in London. Credit default swaps on Ukrainian government debt also soared 57 basis points to 900, the highest among Europe's emerging markets, CMA prices show.

Disclosure Statement: Edward Hugh is a macroeconomist who maintains a premier set of blogs at Global Economy Matters and is a featured analyst at Emerginvest. Edward Hugh provides non-partisan information about world stock markets, and does not have any holdings in foreign equities. The information stated above should not be construed as investment advice, and Edward Hugh is not liable for any actions taken on said materials.

1 comment:

freude bud said...

I'm not clear on how Moscow is desperately attempting to mend fences with the West. The establishment of a natural gas cartel and potentially an oil "production reserve" so as to serve as a swing producer don't strike me as especially ameliorative.

Both sides seem to be looking for a way to come together again, but DC and Moscow have managed public opinion in such a way as to guarantee further contretemps.

The visit by Adm. Mullen to Belgrade and his meeting in Helsinki was a welcome step in the right direction. Moscow's hand is weaker than many appear to see, but DC has wasted a flabbergastingly gigantic amount of international political capital with its shenanigans over the last 8 years. Moscow is well-aware of this.