Streetwise Professor

This Kommersant article discusses a liquidity crisis in Russia. The Central Bank is releasing state funds through repo market transactions to improve the liquidity of non-state banks. This is a difficult decision, given that inflation has heated up substantially in Russia in recent months; the increase in liquidity will exacerbate the inflation problem. Given the political sensitivity of inflation, the Central Bank’s action can be taken as an indication of how severe the liquidity crisis is–or could become.

This is a serious concern in Russia. A good deal of the growth in Russia’s consumer spending has been driven by consumer debt, and a banking crisis would put put this at risk. During my visit to Russia a couple of years ago, I remarked on the number of banks in Russia–the place seems to be severely “overbanked,” and there is considerable room to doubt the soundness of many of these institutions. Given the opacity of the Russian financial system, and the fact that many Russian borrowers are financial neophytes, a financial crisis is not beyond imagining. The Central Bank seems to be trying to get ahead of this problem, but as events in the UK (specifically, the Northern Rock episode) demonstrate, such acts can actually precipitate problems.

So far, the liquidity issues are mere concerns, and not a crisis. Crisis is not inevitable. And perhaps you should take my musings with a grain of salt, as I have thought for years that a crisis in China’s creaky banking system could occur any day–so much for my record as a prognosticator of such things. But it is something to keep an eye on.