EV #103 Russia and the crisis

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No crisis here

Oct 16th 2008
From Economist.com

Waiting for the shake-out behind the scenes

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SEEN through the framework of Western logic, the conclusion is irresistible. Russia’s political idiosyncrasies must give way to the imperative of economics. As the Russian stockmarkets (on the days that they are still open) collapse to two-thirds of their May levels, now is surely time for a calm, business-friendly approach. Stop spooking investors with tough-talking (or worse) foreign-policy gambits; concentrate instead on making Russia’s economy stable.

Such a change of approach would be a fine thing—particularly given Russia’s dismal record over the past eight years when it comes to spending its $1.3 trillion oil and gas bonanza on infrastructure and public services. The trouble is, the people who run Russia appear to see things rather differently.

Vladimir Putin and his colleagues came to power on the back of a financial crisis. In 1998, Russia defaulted on some foreign debts, devalued the currency and let the banking system collapse. In desperation, the Yeltsin family turned to the siloviki (former members of the security services); on the third attempt they chose Mr Putin.

That was then. This is now. In 1998, Russia was awash with debt. Now it sits on a cash pile worth more than $500 billion. Then the oil price was a dismal $12 per barrel. Now it is around $70. Most importantly, perhaps, Russia in 1998 had a lively pluralist media that revelled in uncovering official blunders (sometimes out of pure professionalism, sometimes to please an outside paymaster).

Now the Russian media, particularly television, is under tight control. What most Russians have heard on the news is that America’s financial system has crashed, damaging other Western countries with it. Russia is all but untouched. And Mr Putin got a tiger cub for his birthday, and has released a DVD about judo.

Actually, the crisis does mean problems for Russia. The country has far too many banks, and in particular far too many weak ones (some of them would be better termed “bank-like institutions”). The Russian authorities are using the big state banks to lend $36 billion to the rest of the banking system. That means that Russians need not worry about their savings.

A bigger worry is that Russian companies need to refinance a total of $120 billion in corporate borrowings before the end of the year. The Kremlin is going to help with that too—an elegant reversal of the “loans for shares” swindle of 1995.

It was always puzzling that companies such as Rosneft and Gazprom needed to borrow money at all, given that they were profiting from a boom in oil and gas prices. Even more unclear is where that money was spent (certainly not in big new exploration and development projects). Some cynics might say that these vast sums were stolen, but without details that remains mere speculation. So is the outrageous allegation that some well-informed officials and politicians may have been shorting the market as it collapsed.

The likely upshot is that politically well connected tycoons will be bailed out, while those less favoured (and those who have borrowed rashly) will turn from oligarchs to nanogarchs overnight. Those who control the tap of state spending will decide who survives. It will be interesting how that plays out: collecting debts in Russia may start in court, but end in the morgue. If anything goes wrong, it is clear who will be to blame: not the country’s leaders, but the hapless finance minister Aleksei Kudrin and his beleaguered band of economic “reformers” (for which read: literates).

And as far as the outside world is concerned? Wait and see. But cash is king. And Russia has lots.