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Streetwise Professor

June 30, 2009

King Canute Putin Commands the Financial Tides

Filed under: Financial crisis,Politics,Russia — The Professor @ 9:29 pm

About That Indigenous Financial Market Thing.  It ain’t doing so well.

Fitch and Alfa Bank have issued very harrowing accounts of the financial straits of Russian banks, and the burdens this will place on the government’s finances:

Russian banks need $20 billion to $80 billion in extra capital this year, a senior executive at ratings agency Fitch said, although the head of Russia’s top private bank said the need could be as high as $130 billion.

The forecasts follow a recent assessments by ratings agency Moody’s, which put the need at around $40 billion, and the central bank, which said the need for extra capital would not exceed 500 billion roubles ($16.07 billion) this year.

“We expect loans quality deterioration to be serious enough. We think the banks will need additional capital one way or another on a one-year horizon,” Alexander Danilov, senior director at Fitch’s Russian office, told a conference on Tuesday.

Danilov said the agency’s own stress test had shown that, in an optimistic scenario, non-performing loans (NPL) would reach 15 percent of banks’ loan portfolio by year-end. In the base scenario it would rise to 25 percent, and in a pessimistic scenario 40 percent.

Speaking at a separate conference, Pyotr Aven, president of Alfa Bank, Russia’s largest private bank, said the government must boost its bank recapitalisation plans 10-fold to 10 percent of gross domestic product as defaults may hit $130 billion in the next 12 months.

Aven, known for his bearish views of the impact of the crisis on the banking sector, told a conference the government’s current measures to support the banking sector were not enough.

“The banking sector needs up to 10 percent of GDP, otherwise we won’t restart,” Aven told a conference.

“We are now going down the Japanese path when problems are simply masked… We need to begin from scratch… We are not talking about liquidity, we are talking about capital, about long-term money,” he said.

Earlier, Standard and Poor’s said problem loans could soar to 35-50 percent of total lending in Russia, Ukraine and Kazakhstan, though actual loan losses would not be more than half that level in Russia [ID:nLJ957879].

Twenty-five to forty percent to fifty percent problem loans?  That’s apocalyptic.  

But don’t worry!  Putin has it all under control.  He’s ordering banks to invest $16 billion dollars in struggling Russian companies, and telling bankers not to take any holidays until they have implemented his orders:

Russian Prime Minister  Vladimir Putin  told state-run banks to expedite loans to companies to help stem a financial crisis that will force the government to run deficits for at least three years.

Putin called on banks such as  OAO Sberbank  and VTB Group to boost lending by as much as 500 billion rubles ($16 billion) by October. The government will guarantee 300 billion rubles of the total, he said.

“The government expects that banks will consistently expand lending for the priority industries and reduce borrowing costs,” Putin said today on state television.

What idiocy.  Politicized lending will only weaken further the already shaky banks, as some recognize:

Russia’s plan to use state guarantees to boost lending may exacerbate liquidity risks as state banks expand their portfolios through business loans to unsustainable projects,  Trust Investment Bank  said.

Lenders may require additional support from Russia’s  central bank  after Prime Minister  Vladimir Putin  yesterday instructed banks such as  OAO Sberbank  and VTB Group to boost lending by as much as 500 billion rubles ($16 billion) in the next three months, Moscow-based Trust said in a report today.

The program, which allocates 300 billion rubles in state guarantees on corporate loans, also runs the risk of “dragging out the lives of ineffective companies,” according to the report.

“Banks should be extremely cautious in extending credit, providing it only to those enterprises which have significant potential for development and improving their effectiveness in the future,” Trust said in the report.

And regardless, this Hail Mary is unlikely to make a material difference in an cratering economy.  Russia’s own Economic Development Ministry just posted the low bid in the Dutch auction of forecasts of Russian economic performance in 2009, undercutting the World Bank’s 7.9 percent decline projection:

The Economic Development Ministry has revised its forecast for gross domestic product growth, predicting that the economy will shrink 8.5 percent this year, compared with 6 percent to 8 percent as forecast before, Prime-Tass cited a source in the ministry as saying.

Last week, the World Bank put the contraction at 7.9 percent, compared with 4.5 percent that it forecast earlier, while the Organization for Economic Cooperation and Development estimated a 6.8 percent drop, which is greater than the 5.6 percent it estimated earlier.

The ministry was more optimistic in its inflation forecast. It downgraded the inflation estimate for the year to 12 percent to 12.5 percent, down from 13 percent.

It will be interesting to see how well and how long all the machismo Putin theatrics involving everything from pork chop prices to wage arrears in monotowns to banks will wear in the face of these grim realities.  All of these little plays are intended to demonstrate his control and power.  If, as is likely, the economy continues to implode, they will only demonstrate his impotence.  

 

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6 Comments »

  1. [...] … . Vladimir Putin storms into Moscow supermarket Vladimir Putin-back off, and let the King Canute Putin Commands the Financial Tides – streetwiseprofessor.com 07/01/2009 About That Indigenous Financial Market Thing.  It ain’t [...]

    Pingback by Ладушки.Net » Blog Archive » Posts about Putin as of 01/07/2009 — July 1, 2009 @ 2:09 am

  2. “If, as is likely, the economy continues to implode
    You’re the only one who thinks so. The IMF, WB, OECD, Russian Finance ministry – sources that you just cited – are all estimating GDP growth in 2010. Goldman Sachs just announced that they expect growth to return by the second quarter of 2009.

    Surely they’re all on Putin’s payroll though. You know better. Just like you did when you claimed inflation had nowhere to go but up and mocked Putin for saying it would decline in April. (Oh wait, it did decline significantly…and in May, and June). Just like you did when you claimed Russia would see way higher unemployment than the US. (Oh wait, US unemployment is now 1.1% higher than Russia’s, even after starting from a lower pre-crisis base.)

    Keep mocking though. Surely your constant stream of uninformed kneejerk posts and apocalyptic predictions based on nothing but your sick neocon fantasies of a weak Russia free for the looting will bring credibility to your name.

    Can you do me a favour? In your next post, talk about how I won’t win the lottery next week. *crosses fingers*

    Comment by Bob From Canada — July 2, 2009 @ 2:38 pm

  3. Bob, weren’t you saying last year that the Russian economy was going to grow this year?

    Comment by Michel — July 2, 2009 @ 9:03 pm

  4. I for one agree I was wrong about the magnitude of Russia’s GDP decline.

    SWP still needs to ‘fess up to his mistakes.

    Comment by Sublime Oblivion — July 2, 2009 @ 9:48 pm

  5. Michel: No, I never posted here last year.

    Comment by Bob From Canada — July 2, 2009 @ 11:18 pm

  6. More of Putin’s financial ineptitude via Yulia Latynina in the Moscow Times:

    On June 17, President Dmitry Medvedev and Chinese President Hu Jintao signed an agreement in which Russia will sell 300 million tons of oil to China over 20 years for $100 billion. That breaks down to $57 per barrel.

    In order for Russia to deliver that oil, a new pipeline must be built to China. This is something that Yukos had originally planned to build by the mid-2000s at a cost of $4 billion.

    By March 2008, however, the price for the project had risen to $29 billion. At that cost, oil deliveries through the pipeline would only recoup expenses given oil prices of at least $80 per barrel. But Russia has agreed to a price of just $57 per barrel for its exports to China.

    ——-

    The contract Medvedev signed with Hu means that Russia will inevitably lose its Far East. If you want to see how this process has already begun, take a trip to Blagoveshchensk on the Russian-Chinese border. You will see a dilapidated, depressed town on the Russian side, while just a stone’s throw away on the Chinese side you will see the skyscrapers of the booming town of Heihe.

    One reason for this stark contrast is that the Kremlin is killing off the Far East by prohibiting exports of round timber and hiking import tariffs on used Japanese automobiles. By contrast, the Chinese government has set a national goal of helping its business community to prosper.

    ——

    It is not difficult to see that the Kremlin’s China strategy is identical to the course pursued by former Yukos CEO Mikhail Khodorkovsky — with only one significant difference. If you build an oil pipeline for only $4 billion, develop the region’s oil deposits and sell that oil to China at market prices, you turn eastern Siberia into an extremely powerful economic zone in which the interests of both countries are fused like Siamese twins. This would make a war between Russia and China far less likely since a conflict would result in unacceptable economic losses to both sides.

    But if you build the world’s most expensive oil pipeline for $29 billion while signing a contract to export that oil at a loss and if your idea of developing oil deposits in eastern Siberia boils down to dismantling Yukos and appropriating its assets, then the loss of those territories becomes inevitable — without a single shot being fired.

    http://www.themoscowtimes.com/article/1016/42/379201.htm

    Comment by penny — July 3, 2009 @ 3:05 pm

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