generalspeaking

Thursday, December 25, 2014

Putin, Russia's Imprudent Manager

"Today, I can say that we have entered or are entering a real, full-fledged economic crisis. Next year we will feel it clearly."
"The government has not been quick enough to address the situation. ...I am yet to hear ... its clear assessment of the current situation."
"Russia will get a downgrade. It will enter the 'junk' territory."
Alexei Kudrin, former Russian finance minister

"Urgent measures are needed for the stabilization of the banking system to avoid a panic among the population and a run on banks."
"There are fears about certain banks' ability to survive in the current situation."
Vitaly Isakov, money manager, Otkritie Asset Management, Moscow

"The situation is alarming, confirmed by the fast implementation of measures to recapitalize the banking system."
Oleg Popov, money manager, Allianz Investments, Moscow

"Given that Russian banks face a wave of bankruptcies among corporate and households, more bailouts are inevitable."
Piotr Matys, emerging-market foreign-exchange strategist, Rabobank International

Photographer ANATOLY MALTSEV

Legislation was rushed through the lower house of parliament to allow the Deposit Insurance Agency to buy stakes in banks before bankruptcy proceedings became starkly imminent, to maintain a stable system. The ruble remains degraded by 41 percent and Russia's economy is teetering on recession. The collapse of oil pricing, augmented by the strains on the economy resulting from the sanctions imposed over Russia's actions in Ukraine have created this monster headache for Russia.

National Bank Trust, Russia's 15th largest based on retail deposits has been put under the control of the Deposit Insurance Agency while a $550-million rescue is sought by some angel-investor. Given that international investment has shrivelled, that seems some fond hope. The National Bank Trust was once part of the business empire of formerly imprisoned oligarch Mikhail Khodorkovsky; it lost over three billion rubles last week in retail deposits.

The State Duma, the lower house of parliament, introduced and passed a law on the purchase of banks by the Deposit Insurance Agency following 19 December legislation to permit a one-trillion-ruble rise in the agency's funds and a doubling of insured deposits. The ruble's fall represents the second-worst performance of 170 currencies, just behind Ukraine's hryvnya.

Former Russian finance Minister Kudrin quit his post in 2011 protesting at defence spending increases, which were massive. He has also been critical of Vladimir Putin's inaction on Western sanctions, and Moscow's support for Ukrainian-Russian separatists, along with the annexation of Crimea. Those defiant, injudiciously nationalist actions have come at a dear cost, one that President Putin blames NATO and the EU for, as though the sanctions were imposed for no good reason.

That the Russian economy is overwhelmingly dependent on oil revenue as the major structure of state income has simply ensured the resulting collapse. Economy Minister Alexei Ulyukayev speaks of a "perfect storm" of fallen oil prices, sanctions and scarcity of investors' capital, all aided by a lack of structural reforms. The 17% interest rate hike hasn't helped the plunging ruble.

Rosneft OAO, the country's premier oil company, stated it had met a $7-billion debt repayment delving into its own cash reserves, but that hasn't stopped the bailout prospects of Russian banks. Falling crude prices, according to Mr. Kudrin, represent only partly the ruble's fall, pointing out that sanctions prevent Russian companies from meeting their debt obligations since Western capital access is cut off for them.

He has forecast a series of defaults, and even though banks appear likelier to be supported by the state, that will likely result in rating agencies downgrading Russia's debt to 'junk' status. Russia has been placed one notch above that status this year. He also points to investors' distrust of Russian authorities and their actions, and with good reason.

He feels that even if the price of oil stabilizes to rise to $80 per barrel, GDP is still likely to fall over 2% in 2015. And if the price of crude rises to $60 per barrel, GDP decline would be 4% or greater. Near future prospects for Russia don't look appealing. President Putin, the arrogant and audacious ruler of all he surveys, has committed to some very imprudent actions and his rubles have come home to roost.