It’s been a long hot summer for Russian markets and just when relief appeared to be on the way with an International Monetary Fund (IMF)bail- out package of $22,6-billion, a new wave of panic sent the already brutalised financial markets into a tailspin. Economic fallout from the Russian crisis could spell political trouble.
For European countries nothing is more frightening than a hungry bear on the doorstep, especially one with nuclear weapons and latent expansionist dreams. Some analysts are already predicting that President Boris Yeltsin might be swept from office if his government can’t get a grip on the situation.
Many of those waiting in the wings blame the West for Russia’s ills and believe that the only solution to the problem is to march Russia backwards to past “glory days”. But this was not the case just a few years ago.
The Russian stock market, which is less than 10 years old, got off to a great start with foreign investors pumping billions of dollars into equities. Russian companies have floated American depository receipt (ADR) issues in the United States and the Moscow stock market had a spectacular run in 1996 and 1997.
Russia has more than 1 600 commercial banks, 800 insurance companies, 600 mutual funds and 200 commodity and stock exchanges. The major bourses are in Moscow and St Petersburg, but there are many smaller exchanges throughout the country.
The major players in the Russian markets are seasoned foreign investors – the arena is considered too treacherous for most individuals. Exchange regulations are still lax; it can be difficult to determine the true value of a company or even the actual shareholders.
The best news is that the large number of ADRs has required companies to maintain an international standard of disclosure keeping them on their toes.
This just hasn’t been enough. Russia’s plunging financial markets have cut off the government’s ability to acquire new financing and its ability to raise cash in the short term is in trouble. Public debt is financed by weekly borrowings called GKOs.
As turmoil in the markets has increased, so have the interest rates on these bonds. At one point they were as high as 150%. The central bank has been plundering its precious foreign reserves to keep the rouble stable and, in the process, has been threatening to bring down the country’s banking system.
To make matters worse, billionaire financier and speculator George Soros called for 15% to 25% devaluation of the rouble in a letter to the London Financial Times last week. He said “the meltdown in Russia has reached a terminal phase” and, true to form, the markets again plummeted to new lows.
Devaluation is a dirty word in Russia. A few weeks ago Minister of Finance Mikhail Zadornov declared devaluation “unavoidable” unless the government could improve its tax collection in the coming months.
The government has launched a crackdown on tax evaders in an attempt to collect billions in unpaid revenues which are putting international lending programmes at risk. But to no avail. This week, Russia finally “shifted” the value of the exchange rate at which the rouble is traded for dollars – a de facto devaluation.
Citing the financial markets’ inability to cope with the Asian crisis and the declining price of oil, the central bank said it would allow the rouble to fall by approximately 50% from about 6,3 to the dollar to 9,5.
Most analysts agree that this will have a crushing effect on Russia as it struggles to maintain a semblance of the financial credibility it’s earned over the past six years of haphazard reform. The banks will be hardest hit – they have debts of at least $200- billion and the few assets they do have will probably be wiped out by exposure to “dollar forward” contracts held by Western banks.
The government and central bank said it would pool the resources of leading banks to limit the damage and restructure the government’s short- term debt by declaring a 90-day moratorium on payments of rouble- denominated international notes.
One thing is for sure, confidence is at an all-time low and foreign investors are fleeing the Russian market as fast as they can. For those that remain there’s a lot at stake.
The stock market could collapse and the devaluation of the rouble could translate into a loss of millions of dollars worth of investments and loans. Company profits will also take a beating and the share prices of companies with exposure in Russia would decline.
Russians who have any savings at all are keeping it under their mattresses or in banks overseas. There is an estimated $70-billion in dollar accounts. As a result, the Russian banks are running out of money to pay back loans that are backed by government bonds which are quickly going downhill.
A prophecy comes true? Perhaps. Jim Rogers, an expert in emerging markets and author of Investment Biker, said more than two years ago: “As far as I’m concerned, the former Soviet Union is still the world’s economic, political and social disaster in the making. It will be so for years, if not decades.”
As Rogers points out, big obstacles remain at the political level. Laws are difficult to enforce and the country’s institutions and legal framework are weak. The most glaring example is the country’s inability to collect taxes.
The government is owed the most by Russia’s biggest companies. Gas and oil giant Gazpromreportedly owes $600- million. Companies keep promising to pay – these promises were crucial in securing the $22-billion from the IMF. Meanwhile, the authorities have tried to seize assets – yachts, planes and dachas – but never seem to be able to take possession of anything.
But for most Russians, this is just another crisis in a long list. They do not own shares, or have mortgages, credit cards or car loans – they are more concerned with getting paid.
Most of the workforce hasn’t been paid in nearly a year, some not for two years. The so-called shifting of the rouble is expected to raise prices of imports, most of which are consumer goods, including food.
But it is also expected to ease the government’s budget crunch, enabling them to pay wages and pensions to a population that has been waiting months.
By securing the IMF bail-out and letting the rouble float, Yeltsin has hopefully opened a window of opportunity and bought some time.
A lot will depend on how the Russians react to the austerity budget that has to be implemented. If Russia fails, it will be a long, cold global winter.