Currency markets were rocked this week by a Japanese media report that Russian companies were being asked to restructure their debts to Western banks, prompting concerns of defaults on the $140 billion in corporate debt repayments due this year.
The good news - for Russian banks and their corporate clients - is that the government denied it was planning to restructure $400 billion in corporate debt, and that the report is therefore probably overblown. The debtors (probably) do have enough hard currency on hand to pay down their obligations.
The bad news - for everyone else in Russia - is how they got it.
Ever since the government announced its step-by-step devaluation of the rouble last year, it became a sure-fire, one-way bet against the currency for anyone with the cash to convert.
An inner circle of banks have taken some 3.5 trillion roubles (now worth $100 billion) in uncollaterised loans from the Central Bank. Yet this did not boost rouble liquidity, but simply encouraged the transfer of funds into hard currency.
So far, this losing bet has depleted Russia's reserves to the tune of $200 billion, and comes along with the plummeting oil price and the collapse in stock market values.
In the latest effort to boost rouble liquidity, Prime Minister Vladimir Putin last week ordered another 400 billion roubles to be injected into state banks. He called for those banks to start lending again, but experts are sceptical this will be enough to get the economy growing again.
After all, who would lend in roubles, pay off rouble debts, pay rouble salaries in full and invest roubles into job-creating activities - when you think there's another, simpler way to make money?
And everyone's doing it. Guess what everyone at your workplace is doing on payday - joining the cash lines, so they can convert their "regional reserve currency" into something else.
And this will continue if the Central Bank's latest attempt to draw a line in the sand fails.
The country's GDP will probably fall by 3 to 4 per cent this year, according to Nouriel Roubini, the U.S. economist who was belittled as "Dr. Doom" when he predicted the financial meltdown more than two years ago.
Yet in Davos last month, Roubini was one of the stars of the show - along with Putin, who was making his first appearance at the event.
There, and at a Troika Dialog conference in Moscow a week later, Roubini blamed the Anglo-Saxon model of self-regulated financial markets and credit bubbles for the mess the world is in.
But there's a second elephant in the room in Russia's case -
oil dependence. The country's prosperity has been built on rising oil prices, which swelled the coffers of the government's windfall-tax stabilisation fund - and helped to pay off sovereign debt.
The oil firms who generated those tax roubles then took advantage of Russia's soaring credit rating to soak up some $540 billion in loans with Western banks.
But since oil prices crashed from $140 to $40 per barrel, the tax roubles are drying up - provoking a sharp debate within government about how to revise this year's budget (which was originally based on $95 per barrel).
At the Troika conference, the government official heading the anti-crisis efforts, First Deputy Prime Minister Igor Shuvalov, told investors that budget spending would probably have to be slashed - to bail out the banking system some more. The likely result is even more job losses and economic pain.
Other officials, including Kremlin aide Arkady Dvorkovich, have called for a bailout that would do more to help ordinary Russians. At a conference this week, he called for the oil funds to be used now to fund jobs and social benefits, and invest in infrastructure - even if it entails running a budget deficit of some 8 per cent this year.
After all, if these funds are supposed to be for a rainy day, the time to use them is now. It's been pouring for months already.
Showing posts with label Debt. Show all posts
Showing posts with label Debt. Show all posts
Saturday, 14 February 2009
Sunday, 14 December 2008
Russian Markets Collapse
Russian stock markets experienced another stark collapse Friday, dropping to new lows amid plummeting oil prices and fears of a global recession. At close, the RTS index lost 13.68 percent, closing at 549.93. The index had ceased trading for one hour at 13:10, cancelled trading for shares of Sberbank at 14:30, and finally froze trading altogether at 17:05.
The MICEX, meanwhile, halted trading at 14:10 after losing 14.24 percent, closing at 513.62. The two indexes have lost over half their value in the past month alone. Both will resume trading on Tuesday, October 28th.
The Russian collapse comes in line with falling share prices in Europe, although the reaction in Russia has been much more severe. Fears of a global recession and oil prices at a 16 month low have made many investors fearful about the state of Russia’s oil and gas-rich economy. On Thursday, the Standard & Poor’s rating agency lowered Russia's long-term outlook to “negative” from “stable.”
Crude oil was trading at $63 per barrel on the New York exchange Friday. This posed a serious problem for Russia’s 2009 budget, which will go into deficit below a price of $70 per barrel.
To combat sinking prices, the OPEC cartel announced today that it would cut production by 1.5 million barrels a day. Unfortunately, many investors do not believe the move will be enough to counteract shrinking worldwide demand, and the cut did not have an immediate effect on markets.
The MICEX, meanwhile, halted trading at 14:10 after losing 14.24 percent, closing at 513.62. The two indexes have lost over half their value in the past month alone. Both will resume trading on Tuesday, October 28th.
The Russian collapse comes in line with falling share prices in Europe, although the reaction in Russia has been much more severe. Fears of a global recession and oil prices at a 16 month low have made many investors fearful about the state of Russia’s oil and gas-rich economy. On Thursday, the Standard & Poor’s rating agency lowered Russia's long-term outlook to “negative” from “stable.”
Crude oil was trading at $63 per barrel on the New York exchange Friday. This posed a serious problem for Russia’s 2009 budget, which will go into deficit below a price of $70 per barrel.
To combat sinking prices, the OPEC cartel announced today that it would cut production by 1.5 million barrels a day. Unfortunately, many investors do not believe the move will be enough to counteract shrinking worldwide demand, and the cut did not have an immediate effect on markets.
How Russia can escape the Debt crisis
A Statement by the Liberal Charter alliance
The Liberal Charter alliance expresses its fundamental disagreement with the measures taken by Russian authorities in the financial crisis, and puts forth the principles of a fiscal policy that a government responsible to the citizens of Russia must take.
1. Today’s financial crisis in Russia has foreign and domestic causes. The most important external cause of this crisis is the world monetary system, which goes through cyclical phases of boom and bust. Such instability is created first of all by modern money, which governments can issue in any amount, combined with a wide range of government privileges and guarantees provided to commercial banks. Interest rates held at artificially low levels and government loan guarantees stimulate the growth of credit that is not backed by real savings, leading to less responsibility on the part of creditors and borrowers, and a collapse of confidence in financial assets.
The main culprits of the global financial crisis are the fiscal authorities in the U.S. and European countries, who have pursued a policy of so-called “cheap” money in recent years. The governments of other countries, including Russia, also carry their share of responsibility for spreading and worsening the crisis. Government encouragement of credit expansion has led to massive investments into overly risky, inefficient, and unsalable projects. The illusion of the accessibility of investment resources, created by governments, has led to a decline in the quality of issued loans and purchased securities. As result, many banks have been unable to meet their obligations before depositors.
2. The Russian authorities have contributed their share to the financial “bubble” in our country. Due to their privileged status, state-owned and partly state-owned banks and companies borrowed heavily on foreign and domestic markets. In doing so, short-term loans were used for long-term investments, and to finance expenditures growing out of control. The disappearance of cheap credit destroyed such financial “pyramids”. With a fall in equity prices, companies whose shares were put as collateral to private and partly state-owned companies to obtain credit were now under threat of handing ownership to those creditors, including foreign ones. The threat that companies would be punished for their irresponsible borrowing policies became an instrument of their pressure on authorities, and the basis for transferring their colossal accumulated debts to the federal budget.
3. Provoked by government intervention, the mistakes made by banks and businesses are at the present largely irreversible; serious problems can no longer be avoided. The economy must undergo a period to correct those mistakes.
4. Presently, the primary danger to the global and Russian economies are the so-called “anti-crisis programs” put on by governments, which are hidden behind demagogic statements that the “free market” is supposedly to blame for the current crisis. Government intervention, which hinders the culling of inefficient investment projects, blocks the review of mistaken decisions and puts off the bankruptcy of irresponsible businesses, only deepens and extends the financial crisis, turning an inevitable short-term economic decline into a long-term depression. In world history, it is precisely the interference with market mechanisms that has had such dire consequences, such as the US Great Depression from 1929-33, or the transformation of Great Britain into the “sick man of Europe” from 1961-79, or the Japanese stagnation from 1991-2004.
5. The Liberal Charter alliance expresses a fundamental disagreement with the actions already undertaken, as well as the stated intentions of the Russian authorities – the president, parliament, government, and the Bank of Russia. Their plans of uncontrolled intervention in the country’s economy are, among other things, a disregard for the rule of law and the existing legislation, the undoing of the separation of powers, and the dismantling of democratic institutions accountable to the people.
We believe that the proposed measures are wrong. [These include] the use of federal resources, administered by the Government and Bank of Russia, to finance irresponsible borrowers, to support banks and stock market speculators who risked their client’s money, as well as acquiring shares of those companies that the market has lost confidence in. These measures will squander the federal gold reserves, which guarantee the value and free convertibility of the Russian ruble. They will inevitably result in higher prices for the public, who will end up paying for benefits essentially doled out to businessmen and managers close with the authorities. The concentration of financial resources in the hands of bureaucrats and their “inner circle” is aimed at further monopolization of property and power in our country.
6. In this time of crisis, a government responsible before the Russian people must follow financial policies based upon the following principles:
-Maintaining the exchange rate of the ruble against the pre-determined dollar and euro currency basket. A guarantee of the sanctity of gold reserves in the Bank of Russia to back 100% of issued Russian rubles. Continuing a responsible monetary policy, dictated by the basic principles of respect for property rights and meeting ones obligations, even if these obligations were not explicitly formalized.
-Preserving a deficit-free budget, where expenditures do not exceed revenues, [and committing to] prohibit the growth of public debt. At a time of unavoidable economic stagnation, public expenditures must be lowered proportionately with the fall in government revenues.
-Establishing transparent mechanisms for distributing assistance from the state budget and special endowments. Excluding the possibility that these funds will head to privileged banks and companies. The main way to use the budget surplus, which has accumulated in special endowments, must either be the return of previously collected taxes, or a reduction in future taxes.
- Directing funds from the budget and special endowments to commercial banks only in exceptional cases, and only through the mechanism of returning money to depositors (the so-called “monetization of bank liabilities”). The banks subjected to this measure must undergo bankruptcy proceedings. This provides an effective countermeasure to owners stripping assets, and allows for an open and transparent sale of all assets, with revenues going to the state budget. The expansion of a government role in the banking system’s equity is impermissible.
-It is unacceptable to use budgetary funds to rescue bankrupt companies. It is unacceptable to increase the government’s direct or indirect control over the real sector of the economy. Irresponsible business owners and managers should be punished by having the encumbered shares of bankrupt Russian companies transferred to their creditors– independent from their citizenship or country of registration. Bankruptcy sales must be carried out in open and transparent auctions.
-Reducing government intervention in the financial sector. The reorganization of the financial regulatory system on the principles of competition and free enterprise.
-Reform of the monetary regulatory system. The Bank of Russia should maintain its aim of supporting the value of the ruble, even as it ceases the additional powers granted it under the “anti-crisis measures.” Regulation of banks should be transferred to a separate government body. [This would] eliminate the privileges given to commercial banks, which arise from the Bank of Russia’s joint function of “printing” rubles and regulating the banking system.
7. The Liberal Charter alliance marks that the result of the so-called “anti-crisis programs” proposed by authorities will be the deepening and widening of the financial crisis, and the transition of a short-term recession into an extended depression. Preserving mistakes made during an economic boom, continuing the policy of promoting risky loans, and the misuse of public resources for false purposes will inevitably lead to grave financial, economic and social consequences. Russia does not need to repeat mistakes made more than once by authorities in the US, the European Union and other countries.
The only guarantee of the Russian economy’s competitive edge and long-term success, and that of the whole Russian society– is the freedom of entrepreneurship by Russian citizens. [Further, the] government must respect property rights and carry out responsible, consistent and ethical economic policies.
The Liberal Charter alliance expresses its fundamental disagreement with the measures taken by Russian authorities in the financial crisis, and puts forth the principles of a fiscal policy that a government responsible to the citizens of Russia must take.
1. Today’s financial crisis in Russia has foreign and domestic causes. The most important external cause of this crisis is the world monetary system, which goes through cyclical phases of boom and bust. Such instability is created first of all by modern money, which governments can issue in any amount, combined with a wide range of government privileges and guarantees provided to commercial banks. Interest rates held at artificially low levels and government loan guarantees stimulate the growth of credit that is not backed by real savings, leading to less responsibility on the part of creditors and borrowers, and a collapse of confidence in financial assets.
The main culprits of the global financial crisis are the fiscal authorities in the U.S. and European countries, who have pursued a policy of so-called “cheap” money in recent years. The governments of other countries, including Russia, also carry their share of responsibility for spreading and worsening the crisis. Government encouragement of credit expansion has led to massive investments into overly risky, inefficient, and unsalable projects. The illusion of the accessibility of investment resources, created by governments, has led to a decline in the quality of issued loans and purchased securities. As result, many banks have been unable to meet their obligations before depositors.
2. The Russian authorities have contributed their share to the financial “bubble” in our country. Due to their privileged status, state-owned and partly state-owned banks and companies borrowed heavily on foreign and domestic markets. In doing so, short-term loans were used for long-term investments, and to finance expenditures growing out of control. The disappearance of cheap credit destroyed such financial “pyramids”. With a fall in equity prices, companies whose shares were put as collateral to private and partly state-owned companies to obtain credit were now under threat of handing ownership to those creditors, including foreign ones. The threat that companies would be punished for their irresponsible borrowing policies became an instrument of their pressure on authorities, and the basis for transferring their colossal accumulated debts to the federal budget.
3. Provoked by government intervention, the mistakes made by banks and businesses are at the present largely irreversible; serious problems can no longer be avoided. The economy must undergo a period to correct those mistakes.
4. Presently, the primary danger to the global and Russian economies are the so-called “anti-crisis programs” put on by governments, which are hidden behind demagogic statements that the “free market” is supposedly to blame for the current crisis. Government intervention, which hinders the culling of inefficient investment projects, blocks the review of mistaken decisions and puts off the bankruptcy of irresponsible businesses, only deepens and extends the financial crisis, turning an inevitable short-term economic decline into a long-term depression. In world history, it is precisely the interference with market mechanisms that has had such dire consequences, such as the US Great Depression from 1929-33, or the transformation of Great Britain into the “sick man of Europe” from 1961-79, or the Japanese stagnation from 1991-2004.
5. The Liberal Charter alliance expresses a fundamental disagreement with the actions already undertaken, as well as the stated intentions of the Russian authorities – the president, parliament, government, and the Bank of Russia. Their plans of uncontrolled intervention in the country’s economy are, among other things, a disregard for the rule of law and the existing legislation, the undoing of the separation of powers, and the dismantling of democratic institutions accountable to the people.
We believe that the proposed measures are wrong. [These include] the use of federal resources, administered by the Government and Bank of Russia, to finance irresponsible borrowers, to support banks and stock market speculators who risked their client’s money, as well as acquiring shares of those companies that the market has lost confidence in. These measures will squander the federal gold reserves, which guarantee the value and free convertibility of the Russian ruble. They will inevitably result in higher prices for the public, who will end up paying for benefits essentially doled out to businessmen and managers close with the authorities. The concentration of financial resources in the hands of bureaucrats and their “inner circle” is aimed at further monopolization of property and power in our country.
6. In this time of crisis, a government responsible before the Russian people must follow financial policies based upon the following principles:
-Maintaining the exchange rate of the ruble against the pre-determined dollar and euro currency basket. A guarantee of the sanctity of gold reserves in the Bank of Russia to back 100% of issued Russian rubles. Continuing a responsible monetary policy, dictated by the basic principles of respect for property rights and meeting ones obligations, even if these obligations were not explicitly formalized.
-Preserving a deficit-free budget, where expenditures do not exceed revenues, [and committing to] prohibit the growth of public debt. At a time of unavoidable economic stagnation, public expenditures must be lowered proportionately with the fall in government revenues.
-Establishing transparent mechanisms for distributing assistance from the state budget and special endowments. Excluding the possibility that these funds will head to privileged banks and companies. The main way to use the budget surplus, which has accumulated in special endowments, must either be the return of previously collected taxes, or a reduction in future taxes.
- Directing funds from the budget and special endowments to commercial banks only in exceptional cases, and only through the mechanism of returning money to depositors (the so-called “monetization of bank liabilities”). The banks subjected to this measure must undergo bankruptcy proceedings. This provides an effective countermeasure to owners stripping assets, and allows for an open and transparent sale of all assets, with revenues going to the state budget. The expansion of a government role in the banking system’s equity is impermissible.
-It is unacceptable to use budgetary funds to rescue bankrupt companies. It is unacceptable to increase the government’s direct or indirect control over the real sector of the economy. Irresponsible business owners and managers should be punished by having the encumbered shares of bankrupt Russian companies transferred to their creditors– independent from their citizenship or country of registration. Bankruptcy sales must be carried out in open and transparent auctions.
-Reducing government intervention in the financial sector. The reorganization of the financial regulatory system on the principles of competition and free enterprise.
-Reform of the monetary regulatory system. The Bank of Russia should maintain its aim of supporting the value of the ruble, even as it ceases the additional powers granted it under the “anti-crisis measures.” Regulation of banks should be transferred to a separate government body. [This would] eliminate the privileges given to commercial banks, which arise from the Bank of Russia’s joint function of “printing” rubles and regulating the banking system.
7. The Liberal Charter alliance marks that the result of the so-called “anti-crisis programs” proposed by authorities will be the deepening and widening of the financial crisis, and the transition of a short-term recession into an extended depression. Preserving mistakes made during an economic boom, continuing the policy of promoting risky loans, and the misuse of public resources for false purposes will inevitably lead to grave financial, economic and social consequences. Russia does not need to repeat mistakes made more than once by authorities in the US, the European Union and other countries.
The only guarantee of the Russian economy’s competitive edge and long-term success, and that of the whole Russian society– is the freedom of entrepreneurship by Russian citizens. [Further, the] government must respect property rights and carry out responsible, consistent and ethical economic policies.
Standard & Poor downgrade Russia
In the latest news item to predict a chaotic future for the Russian economy, the Standard & Poor’s rating agency cut the country's debt rating (Rus) for the first time in a decade Monday. In a separate press-release, the agency also cut it's rating of a series of companies connected with the government and regional authorities (Rus), including oil and gas heavyweights Gazprom, Transneft and Rosneft.
Russia’s long-term foreign currency sovereign credit rating fell to BBB in the long-term, and A-3 in the short term, with a negative outlook. This means Russia is now just two notches above the “junk” category, and continuing adverse economic conditions could prevent Russia from meeting its financial obligations in the future.
The drop is tied closely with capital flows moving out of Russia, and with a sharp decline in Russian foreign currency reserves. The new ranking marked the first time Russia’s sovereign rating had been cut since the escalation of the financial crisis.
Other ratings agencies have also lowered their forecasts for Russia’s economy, warning of growing signs of trouble. Standard & Poor’s has lowered its outlook twice in 2008, moving from “positive” to “stable,” and ultimately to “negative.”
In a sign of how quickly the global crisis has reversed Russia’s economic fortunes, Standard & Poor’s cut the country’s debt rating on Monday for the first time in a decade, warning of the “rapid depletion” of Russia’s massive reserves.…
Russia is now two notches above the “junk” category of high-yield bonds that ratings agencies consider speculative.…
The agency warned that if oil prices remain low over the next two years, Russia will run through all of the $209 billion it has saved from its oil revenues in special rainy-day funds.…
But officials have said as many as 200,000 jobs could be cut over the next two months, and many economists warn that the actual figure could be substantially higher.
A survey released last week by the Public Opinion Foundation found that almost a third of Russians said the economy is in crisis. Forty-one percent said their own economic situation had worsened in the past two or three months, the highest level this year. Ordinary Russians have scrambled to shift from rubles into dollars and euros, reversing hard-fought gains in confidence in the Russian currency. Central-bank data show that Russians bought a record $16.9 billion in foreign currency in October, the last month for which figures are available.
After growing at nearly 8% in the past two years, the economy is decelerating sharply: S&P warned that Russia’s economy, measured in dollar terms, is likely to shrink next year. That would be a drastic turnabout from the decade of steady growth since Russia defaulted on its debt and devalued the ruble in 1998.
Russia’s long-term foreign currency sovereign credit rating fell to BBB in the long-term, and A-3 in the short term, with a negative outlook. This means Russia is now just two notches above the “junk” category, and continuing adverse economic conditions could prevent Russia from meeting its financial obligations in the future.
The drop is tied closely with capital flows moving out of Russia, and with a sharp decline in Russian foreign currency reserves. The new ranking marked the first time Russia’s sovereign rating had been cut since the escalation of the financial crisis.
Other ratings agencies have also lowered their forecasts for Russia’s economy, warning of growing signs of trouble. Standard & Poor’s has lowered its outlook twice in 2008, moving from “positive” to “stable,” and ultimately to “negative.”
In a sign of how quickly the global crisis has reversed Russia’s economic fortunes, Standard & Poor’s cut the country’s debt rating on Monday for the first time in a decade, warning of the “rapid depletion” of Russia’s massive reserves.…
Russia is now two notches above the “junk” category of high-yield bonds that ratings agencies consider speculative.…
The agency warned that if oil prices remain low over the next two years, Russia will run through all of the $209 billion it has saved from its oil revenues in special rainy-day funds.…
But officials have said as many as 200,000 jobs could be cut over the next two months, and many economists warn that the actual figure could be substantially higher.
A survey released last week by the Public Opinion Foundation found that almost a third of Russians said the economy is in crisis. Forty-one percent said their own economic situation had worsened in the past two or three months, the highest level this year. Ordinary Russians have scrambled to shift from rubles into dollars and euros, reversing hard-fought gains in confidence in the Russian currency. Central-bank data show that Russians bought a record $16.9 billion in foreign currency in October, the last month for which figures are available.
After growing at nearly 8% in the past two years, the economy is decelerating sharply: S&P warned that Russia’s economy, measured in dollar terms, is likely to shrink next year. That would be a drastic turnabout from the decade of steady growth since Russia defaulted on its debt and devalued the ruble in 1998.
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