A free lesson from Russia: how to manage a banking crisis
One of the saddest aspects of 21st America is our parochialism, esp in public policy. We consider America the exemplar of best practices — sometimes along with the UK – usually with little knowledge of the ROW (a revealing phrase, “rest of the world”). Often global phenomena are seen purely as resulting from US developments, as if we are the dog and ROW the tail.
Often nations — each with their own problems — do things we can learn from, and often emulate. Such as Russia’s response to its banking crisis, in the midst of a recession and currency crisis worse than our own (so far, at least).
For a brief description we turn to “Too Early to Tell“, Eric Kraus, Truth and Beauty, 15 January 2009, pp 17-18 – Russia shows how to handle a banking crisis. Excerpt:
We readily acknowledge that we were taken by surprise by the havoc in the Russian economy. Russia had been motoring along quite nicely when it was suddenly blind-sided by the combination of a historic collapse in commodity prices and the sudden, radical drying up of all global credit. As Roland Nash put it:
“in August, Moscow hotels were packed with Western bankers desperate to lend to Russian corporations – by October, the same corporates could not even roll over their maturing credit lines.”
Similarly, while a 75% collapse in the price of the main export product would have seriously affected any commodity producer, the high export dependency of Russia increased said vulnerability. Given the combination of these two shocks, it is a testament to the quality of Russian macroeconomic policy adjustments that the crisis has not been far worse. …
The Autum of the Oligarch
… The deadly combination of easy credit, the widely-shared illusion that prosperity would never cease, and what can only be described as the great Russian tradition of mood swings between the blackest pessimism and the wildest exuberance led to a large coterie of top Oligarchs becoming dangerously overleveraged and thus highly exposed to equity price swings. They were caught offsides by the sudden onset of the economic crisis after pledging large blocks of stock in their core holdings to the global banks, generally as security for loans used for the purchase of further assets, both in Russia and abroad.
With the likes of Deripaska and Potanin pushed deeply into margin call territory by a combination of the sudden global credit crunch and the collapse of the Russian equity market (driven largely by the forced liquidation of repoed assets) and with no alternative sources of finance available, there was a real danger that prime Russian assets would fall into the hands of foreign lenders – anathema to the Putin administration.
In order to avoid a fire-sale of pledged assets to the Western banks, the Russian administration chose to deploy sovereign reserves, either directly or via VEB, to substitute for Western credit lines to defaulting local entities. Unlike the situation in some Western countries where taxpayer finance was provided essentially gratis, the Russian bailouts were generally granted at market interest rates, and required good collateral – usually the pledged shares.
Given that the terms of the loans have been relatively short – generally 12 months – we think it likely that at least some oligarchs will be unable to reclaim their shares which will thus revert to state-controlled banks, thus resulting in a shares-for-loans swap, i.e. a belated reversal of the infamous loans-forshares auctions.
Statements from various high-level officials suggest that the Russian State will retain the shares for several years, possibly restructuring the holdings before auctioning them off again. Top Putin aide Arkady Dvorkovich declared that the Russian government was not interested in long-term ownership of the assets, however we cannot exclude the possibility that a sovereign holding company will instead be established to manage assets in sectors adjudged to be strategic.
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To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- About Financial crisis – what’s happening? how will this end?
- About End of the post-WWII geopolitical regime
Other posts about Russia (the last is the most important):
- Forecasts – Why wait? Read tomorrow’s news … today! (part I), 11 July 2006 – Rise of the petro-empires
- More news about Russia’s demographic collapse, 6 June 2008
- Perhaps *the* question about the Georgia – Russia conflict, 10 August 2008
- Keys to interpreting news about the Georgia – Russia fighting, 12 August 2008
- What did we learn from the Russia – Georgia conflict?, 13 August 2008
- Comments on the Georgia-Russia fighting: Buchanan is profound, McCain is nuts, 15 August 2008
- Best insight yet about America and the Georgia-Russia fighting, 15 August 2008
- Georgia = Grenada, an antidote to Cold War II, 16 August 2008
- “The Medvedev Doctrine and American Strategy”, by George Friedman, 4 September 2008
- Before we reignite the cold war, what happened in Georgia?, 12 December 2008
- Rumors of financial war: Russia vs. US, 22 December 2008
- More weekend reading; information you want to have!, 23 December 2008 — Russia as the last man standing in a region of demographic collapse.