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Posts Tagged ‘Russian government’
Friday, December 19th, 2008
As we have been reporting on this space, the Russian and Ukrainian currencies have been declining along with their economies. While Russia has been able to stave off a complete collapse due to the foreign currency reserves it holds, it is only a matter of time before the ruble descends to much lower levels.
For now though, the Russian Government has managed a slower depreciation. When the foreign reserves decline further, and oil & gas prices continue their current trend, capital flight will accelerate in 2009. This will force the ruble lower.
For Ukraine there are fewer options. No cash reserves or oil resources means that Ukraine is subject to the whims of a volatile market in crisis. The recent emergency loan from the International Monetary Fund (IMF) to Ukraine stabilized the markets here to a great extent, but the real stabilization will come when the market hits bottom and government reforms. The loan from the IMF in fact, was contigent on reforms.
As for 0900 this morning of Friday the 19th of December, the Ukrainain currency-the hyrvnia (UAH) is selling at 7 to 1 U.S. dollar at local kiosks here in Odessa. Yesterday it was at 10 to 1 U.S. dollar.
As we have mentioned in an earlier post on this blog, it is a seasonal ritual. During the holiday season or summer tourist season, the Ukrainian Government shores up the hryvnia against foreign currencies. This past summer for example, the hryvnia was at 4.6 to 1 U.S. dollar. As soon as the tourists departed, it went back up to the 5 to 1 U.S. dollar rate where it had been averaging for the past several years in a tight trading range or “peg.”
In the end, neither the Russian or Ukrainian Governments will not be able to over-rule the markets.
Technorati Tags: Russia, Ukraine, U.S. dollar, Anton Olff, currencies, Odessa, ruble, hyrvnia, UAH, International Monetary Fund, IMF, economy, foreign reserves, foreign currency, Russian Government, depreciation, oil, gas, capital flight,
Tags: Anton Olff, capital flight, currencies, depreciation, economy, foreign currency, Foreign Reserves, gas, hyrvnia, IMF, International Monetary Fund, Odessa, oil, ruble, Russia, Russian government, U.S. dollar, UAH, ukraine
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Thursday, December 11th, 2008
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Richard Hainsworth’s commentary on www.businessneweurope.eu is correct about the current Russian banking system. The global economic crisis has strained even the healthiest banks and systems beyond what they were “engineered” to do.
It will be interesting to see how the Russian Government responds to this. They could for example, recapitalize some banks during periods of seasonal stress, providing short term bridge loans.
The question of long term financing is something that will need to be addressed once the immediate crisis is in a more manageable stage. Russia, as well as other emerging markets-could probably do more to open its banking sector to foreign competition.
Quality not quantity in Russian banking |
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Richard Hainsworth of RusRating/GlobalRating
December 11, 2008
Assessing the asset quality underlying a bank or banking system is an essential prerequisite for making a judgment about its strength. The irrational exuberance of the early 2000s has given way to equally irrational pessimism currently afflicting traders.
The facts are certainly clear: there is a wave of corporate defaults, and Russian banks are having their liquidity and operational risk system tested. Some have failed. Nevertheless, the interpretation of these facts needs to be rational.
Two structural factors need to be considered in such an interpretation. First, the Russian economy has a single tax year, ending on December 31. This means that all contractual obligations, trade transactions and long-standing loan agreements tend to be tied to the year-end. The pressure on all banks and corporates to close operations is always highest in November and December. Consequently, any economic activity peaks at this time, which also means that the strain in a period of turbulence will be severest at this time. It is analytically incorrect to take data points from November and December and extrapolate them linearly into January and February.
Secondly, Russia – just like all the countries of the CIS – does not have any significant source of medium to long term (viz., over a year) funding. At the same time, companies in a period of expansion need funding for three to five years because it takes that long for a new piece of plant or project expansion to be bought, installed and start generating cash. The result is that the real economy needs three-to-five year funding, but the banks can only provide short-term lending. The result is a maturity gap between the needs of the economy and the abilities of the banking sector.
Ordinarily, this is no problem. A functioning economy is a dynamic system and short-term funding is constantly being replenished with interest income and repayments from the real sector. Banks are willing to lend to corporates for longer periods, but for compliance purposes request one-year loan contracts. Corporates hedge their refinancing risks by establishing lines with several banks. However, when there is a liquidity crunch, the banking system as a whole retains liquidity and corporates cannot refinance. Since the loans are one-year long, they come due. They cannot be refinanced, so the corporate defaults. In ordinary times, a default means that the company is weak or mismanaged. But in a time of crisis, the corporate may be strong, but without liquidity. A default in a time of crisis does not mean that the underlying corporate is weak.
Deeper questions
This leads to a much deeper question of finance and economics. If an enterprise or bank is judged to be strong solely on the grounds of its liquidity in a time of global crisis, then what should it do in a time of normality? If it retains levels of liquidity in reserve that would be adequate in times of crisis, then it will be unable to lend those resources for any long period of time. This will reduce the rate at which a banking system can lend to the economy and the ability of the economy to grow and develop.
Returning to Russia, the inability of companies to repay the principle on loans that do not match their borrowing requirements is more about their levels of liquidity going into the crisis. Those loans may still be performing in terms of interest being paid and would not be considered to be in default had the legal form matched the economy substance.
Taking these two factors (intense year-end contractual activity and a contractual mismatch in funding) into consideration, a wave of corporate defaults during a global crisis in November and December does not mean that the Russian economy or the banking system is inherently weak, or that it’s inevitable the crisis will continue into 2009.
Richard Hainsworth is CEO of RusRating/GlobalRating, CFA |
Technorati Tags: Richard Hainsworth, short-term funding, Russian economy, CIS countries, tax year, irrational exuberance, irrational pessimism, traders, corporate defaults, Russian banks, liquidity, Anton Olff, emerging markets, foreign competition, RusRating/Global Rating, Russia, www.businessneweurope.eu, economic crisis, Russian government,
Tags: Anton Olff, CIS countries, corporate defaults, economic crisis, emerging markets, foreign competition, irrational exuberance, irrational pessimism, liquidity, Richard Hainsworth, RusRating/Global Rating, Russia, Russian banks, Russian economy, Russian government, short-term funding, tax year, traders, www.businessneweurope.eu
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Wednesday, December 10th, 2008
As with many emerging markets, Russia should continue to grow despite the Global Economic situation. The direct link between oil price levels and economic growth is key.
This from www.themoscowtimes.ru:
GDP Posts Weakest Growth in 3 Years
10 December 2008By Maria Levina / Special to The Moscow Times
Economic growth fell to its slowest rate in three years in the third quarter, at 6.2 percent, the State Statistics Service reported Tuesday, and economists say even lower growth is in store for 2009.
Actual GDP growth in the quarter missed the Economic Development Ministry’s forecast of 7.1 percent, driven by significantly slower growth in the construction, retail, transport and communications sectors.
The decline continued a slide from 8.5 percent GDP growth in the first quarter and 7.5 percent in the second, and if the trend continues the final number for the year could be in the 6 percent range.
“Next year’s GDP growth could range from negative 5 percent to plus 5 percent, depending on what happens to oil prices and the steps taken by the Russian government,” said Yevgeny Gavrilenkov, chief economist at Troika Dialog. “If it continues to throw away currency reserves to defend the ruble, Russia may face a fiscal deficit and zero economic growth.”
He said allowing the ruble to depreciate is one step that could be taken to prop up growth numbers.
“In the past, the Russian economy grew even with oil prices of $30, $40 and $50 per barrel but at a different exchange rate,” he said. “In the current environment, Russia’s goal should be to achieve positive economic growth and avoid a fiscal deficit.”
In year-on-year terms, growth in the fourth quarter could end up at zero, partly as a result of slower production growth and partly because the number was strong in the final quarter of last year, said Yekaterina Malofeyeva, chief economist at Renaissance Capital.
She said she expects growth this year to finish above the 6 percent mark — at 6.2 percent — and that next year’s figure could range from zero to 3 percent.
“If oil prices average $70 a barrel next year and the ruble is allowed to depreciate, GDP growth could reach 3 percent,” Malofeyeva said. “Otherwise, it could be flat.”
Although the Economic Development Ministry has yet to release an official forecast, in recent informal comments it has put the number at 3 percent to 3.5 percent if oil prices average $50 per barrel for the year.
But economists say conditions have been shifting so rapidly that providing anything resembling an accurate forecast for 2009 would be difficult until all the numbers for the final quarter of this year have been released.
The Economic Development Ministry said Monday that it was revising its forecast for manufacturing growth for the year downward, from 5.2 percent to 2.9 percent. The figure for the first 10 months of this year was 4.9 percent, so the ministry’s forecast suggests that it is expecting disastrous results in November and December, with production dropping by over 10 percent.
Gavrilenkov said he believed that a 2.9 percent production forecast was overly pessimistic but, if accurate, would mean that the country is entering a severe depression.
He added that losses on the manufacturing side could be balanced somewhat by growth in the service sector, as consumer spending has remained relatively strong. As such, he said he expected GDP growth of 6.8 percent to 6.9 percent this year.
Natalya Orlova, chief economist at Alfa Bank, said she was surprised by how low the production numbers were.
“Given that the October numbers showed there was essentially no growth (0.6 percent), we originally assumed a drop in production of 2 to 3 percent in November and December, which would still imply a growth rate of around 5 percent for the year,” Orlova said. “But if we are to believe the numbers from [Economic Development Minister] Nabiullina, with a drop of more than 10 percent in November and December, then the situation seems more serious.”
Technorati Tags: emerging markets, Russia, Natalya Orlova, Alfa Bank, Moscow, Yekaterina Malofeyeva, Renaissance Capital, exchange rate, Russian Government, oil prices, ruble, devaluation, Yevgeny Gavrilenkov, Troika Dialog, State Statistics Service, Economic Development Ministry, construction, retail, transport, communications, Anton Olff, GDP, Maria Levina, www.themoscowtimes.ru, economic growth,
Tags: Alfa Bank, Anton Olff, communications, construction, devaluation, Economic Development Ministry, economic growth, emerging markets, exchange rate, GDP, Maria Levina, Moscow, Natalya Orlova, oil prices, Renaissance Capital, retail, ruble, Russia, Russian government, State Statistics Service, transport, Troika Dialog, www.themoscowtimes.ru, Yekaterina Malofeyeva, Yevgeny Gavrilenkov
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Tuesday, December 9th, 2008
Russia’s economy is captive to oil & gas prices. If the price of crude continues to decline-and there is sufficient reason that it will continue to do so-then the prospects for Russia’s economy must also be adjusted.
Most Russians have painful memories of the 1998 financial crisis. It is one of prime motivations behind the Russian Government’s aggressive stance regarding the ruble. The political backlash of a currency rout could be devastating.
As this article from the Financial Times (www.ft.com) states, Russia is now in a much better financial position compared with the 1990s. However, at the rate that the Russian reserves are being utilized, the Russian Government may not have sufficient ammunition to counter any new economic shocks.
At some point, the Russian Government might consider even closer ties with cash rich China. These might include the sale or long term leasing of strategic assets located in Siberia.
Rouble exodus hits Russia credit rating
By Catherine Belton in Moscow
Published: December 8 2008
Russia on Monday became the first G8 country since the start of the financial crisis to have its credit rating downgraded after Standard and Poor’s took fright at the recent exodus from the rouble and sharp drop in oil prices.
S&P said it had lowered Russia’s foreign currency credit rating by one notch from BBB+ to BBB because of the “rapid depletion” of the country’s foreign exchange reserves and the “difficulty of meeting the country’s external financing needs”. It said the outlook for the rating was negative.
Russia’s reserves have fallen by $128bn since August to $455bn, as the country battles the capital flight that began following the war with Georgia and escalated as the oil price fell and the global crisis worsened.
S&P said Russia could be forced to spend all $200bn now parked in its two sovereign wealth funds on recapitalising the banking system and covering fiscal deficits in 2009 and 2010.
The agency expects Russia to run a current account deficit next year of 2.6 per cent of gross domestic product due to the oil price fall, putting further pressure on the balance of payments.
“There are a lot of layers of concern,” said Frank Gill, primary credit analyst at Standard and Poor’s. “There are macroeconomic and political risks . . . and Russia has not operated a current account deficit since 1997 and that was less than 1 per cent of GDP.”
Vladimir Putin, Russia’s prime minister, has staked his political credibility on avoiding a sharp rouble depreciation.
The thought of devaluation raises the spectre of the 1998 rouble crash that wiped out Russians’ savings, although economists say any devaluation this time.
Technorati Tags: Russian, ruble, Georgia, Vladimir Putin, current account deficit, Frank Gill, political risks, capital flight, credit rating, G8, Catherine Belton, Moscow, Standard and Poors, Financial Times, GDP, www.ft.com, Anton Olff, Russian Government, Russian economy, oil prices, 1998 financial crisis, currency devaluation
Tags: 1998 financial crisis, Anton Olff, capital flight, Catherine Belton, credit rating, currency devaluation, current account deficit, Financial Times, Frank Gill, G8, GDP, Georgia, Moscow, oil prices, political risks, ruble, Russian, Russian economy, Russian government, Standard and Poors, Vladimir Putin, www.ft.com
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Monday, December 8th, 2008
One of the side effects of the Global Economic Crisis-and we have to come up with a new name for this “crisis,” is the steep falloff in the amount of money sent home by immigrants and workers abroad. Many emerging market economies depend on this income to sustain themselves. The fallout from the falloff could be huge…..
| Falling remittances to hit CIS |
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Clare Nuttall in Almaty December 8, 2008
As the world’s rich economies sink into recession, the flow of remittances into developing countries is expected to see a corresponding decrease. In the CIS countries that rely heavily on payments from migrant workers abroad, the effect could be highly damaging. The construction and consumer-related sectors are expected to be particularly badly hit.
The Organisation for Economic Co-operation and Development (OECD) forecasts a drop of 6% in remittance payments to developing countries from their nationals working abroad in 2009. CIS countries are among the largest recipients of remittance payments measured in comparison to their GDP.
The Remittances Factbook 2008, published by the World Bank, finds that Tajikistan and Moldova are tied as the top remittance receiving countries – remittance inflows amount to 36% of their GDP. One NGO worker in Tajikistan reports seeing a jet leave from Dushanbe every week to Moscow, with 500 young men on board, while observers of the Moldovan market joke that “will the last Moldovan left please turn off the light.” Other CIS countries are also high on the list: Kyrgyzstan was in 4th place, with transfers from migrants equal to 27% of its GDP; in Armenia the figure is 18%. Only Russia and Kazakhstan have net outflows of money.
Speaking at the World Bank/IMF annual meeting recently, Shigeo Katsu, World Bank vice president for Europe and Central Asia, warned: “This money sent back home is second only to foreign direct investment as a source of external finance across the region, and is the largest source of external finance for a number of low income and lower middle income countries.”
Laid low
There are already signs the flow of money into the CIS’ poorer economies is tailing off as the US and West European economies suffer from the second wave of the credit crisis, while the previously strong growth in Russia and Kazakhstan dissipates – forecasts for 2009 are 3% and 2.7-4.1% respectively.
Reliable data on the situation in Central Asia is hard to come by, but anecdotal evidence suggests that migrant workers from Kyrgyzstan and Uzbekistan were the first to be laid off when work slowed or stopped at Kazakhstan’s construction sites. In Moscow and other Russian cities, many sites are also staffed by workers from other CIS countries. As in Kazakhstan, the Russian government has recently announced it will take measures to shore up the struggling construction sector.
A slowing of growth in the Russian economy is likely to be particularly damaging to Armenia, where 70% of remittances are sent from Russia; the amount is closely correlated with Russian GDP. Meanwhile, Moldova has seen many migrants return home in recent months, according to Matthias Lücke, senior economist at the Kiel Institute and head of the institute’s project on migrant remittances in CIS countries. “Based on the available statistics, the number of migrants is now lower than a year ago, by one fifth,” says Matthias Lücke, though he points out that there has not yet been a decline in remittances, according to available data.
The Kyrgyz government has already sounded the alarm. Economy Minister Akylbek Japarov warned in November that the international crisis could tip the country into financial collapse. He forecast that both FDI and remittances to the country would fall steeply in 2009, with a damaging effect on the already struggling. “Our government is in real terms on the threshold of a financial crisis. A decline in Kyrgyzstan’s economic situation is quite possible by February or March 2009,” Japarov said in a televised address.
Aside from consumption, the sector that has benefited the most from remittance inflows is real estate. Poor business environments and under-developed stock markets mean there are few alternatives to investing in real estate - aside from saving abroad or keeping their money under the mattress. As a result, the housing sectors in most of these countries have boomed lately, out of proportion to continuing low wage levels.
“What do migrants do with their money? The business climate in Moldova is so awful that unless you are well connected, you can’t invest it in the country since everyone will be demanding payoffs,” says Lücke. “The options are to renovate your house, to keep it under the mattress or to save it abroad in preparation for when you emigrate permanently. People are also buying real estate in the capital – there is a real property bubble for apartments in Chisinau.” The cost of an apartment in Chisinau increased on average by 5.5% in September 2008, and new buildings are still going up – the city mayor recently unveiled the Malldova shopping centre and at one upscale estate, developers are throwing in a free car with each house bought.
Real estate prices in both Bishkek and Dushanbe have increased rapidly in recent years. In Armenia, where money transfers are highly correlated to real estate prices, according to the IMF the construction sector overtook industrial production this year to become the largest sector of the economy, accounting for 23.2% of GDP. But just as this happened, the trend started to reverse. After seven years of continuous growth in real estate prices, a slight fall was recorded in 2008, said government agency State Real Property Cadastre. Prices in central Yerevan have fallen by an average of 3%, while in the rest of the country they are down by an average of 1.5%. There was also an 11% year-on-year decrease in the number of property deals registered from August through September. A similar story can be expected in other economies highly reliant on remittances.
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Technorati Tags: Global Economic Crisis, State Real Property Cadastre, Bishkek, Chisnau, Kyrgyz Republic, Akylbek Japarov, Armenia, Matthias Luke, Kiel Institute, Kazakhstan, Uzbekistan, construction, Russian government, Anton Olff, external finance, Russia, United States, Western Europe, Dushanbe, World Bank, IMF, Shigeo Katsu, Tajikistan, Moldova, NGO, CIS countries, recession, Clare Nuttall, Almaty, Organization for Economic Co-Operation and Development (OECD), remittance payments, emerging markets,
Tags: Akylbek Japarov, Almaty, Anton Olff, Armenia, Bishkek, Chisnau, CIS countries, Clare Nuttall, construction, Dushanbe, emerging markets, external finance, Global Economic Crisis, IMF, Kazakhstan, Kiel Institute, Kyrgyz Republic, Matthias Luke, Moldova, NGO, Organization for Economic Co-Operation and Development (OECD), recession, remittance payments, Russia, Russian government, Shigeo Katsu, State Real Property Cadastre, Tajikistan, United States, Uzbekistan, Western Europe, World Bank
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