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Russia Manufacturing Drops to Lowest on Record

Russian manufacturing shrank more in November than during the 1998 financial collapse as the global economic crisis drove output and new orders to record lows and companies cut jobs, VTB Bank Europe said.

VTB’s Purchasing Managers’ Index fell for a fourth month to 39.8, its lowest level, from 46.4 in October, the bank said in an e-mailed statement today. The previous low was 43.2 in September 1998, a month after the government’s ruble devaluation and default on $40 billion of debt. A figure above 50 means growth, below 50 a contraction. The bank surveyed 300 purchasing executives.

“The sense of doom and gloom was only deepening,” in November, Tatiana Orlova an economist in Moscow at ING Group NV said by telephone. “The mood isn’t getting any better.”

Industrial production has slumped and unemployment is rising as declining commodities prices and the seizure of credit markets prompt an outflow of capital. Investors withdrew $190 billion from the country since August, BNP Paribas SA estimates, as oil fell below the $70-a-barrel average needed to balance the 2009 budget.

“Driving the rapid contraction of the manufacturing sector in November was a record fall in incoming new work,” the bank said in the statement. New export contracts tumbled because of “fallout from the global financial crisis.”

Lower Ruble

The ruble, which the central bank manages against a basket of dollars and euros, weakened 0.1 percent to 27.9438 per dollar by 11:11 a.m. in Moscow, from 27.9231 on Nov. 28. Against the euro, it was little changed at 35.4468, from 35.4379. The benchmark Micex stock index, fell 0.21 percent to 610.04 at 11:12 a.m.

Russian economic growth, which Prime Minister Vladimir Putin touted as a major achievement before stepping down as president in May after eight years, will slow to 3 percent next year from an average of 7 percent a year since 1999, the World Bank estimates. The economy grew 8.1 percent in 2007.

Adding to evidence that recessions in the U.S., Europe and Japan are dragging down the world’s fastest-growing economies, China’s manufacturing also shrank by the most on record in November as export orders plunged.

OAO Severstal, Russia’s largest steelmaker, shut down a blast furnace that supplied 13 percent of the pig iron produced at its main Russian factory because of its age and as global steel demand weakens, the company said on Nov. 28.

Slowing Output

Industrial production in October grew at the slowest annual pace since the Federal Statistics Service changed its methodology at the start of 2003, according to revised data. Unemployment rose to 6.1 percent from 5.3 percent in September.

“Sharp falls in output were also accompanied by a substantial decline in employment,” said Dmitri Fedotkin, an economist at VTB Research, in the report.

OAO Magnitogorsk Iron & Steel, the third-largest Russian steel company, and OAO Razgulay Group, a Russian grain and sugar producer, have said they will shed staff and may decrease wages for some remaining workers.

“What began as a financial crisis became an economic one before our eyes,” Putin said at the Nov. 20 congress of his United Russia party in Moscow.

About 1,070 Russian companies have already announced plans to cut approximately 45,000 jobs, Rossiyskaya Gazeta, the government’s official newspaper, said on Nov. 14, citing the Health and Social Development Ministry’s estimates. The reductions have affected the finance and automobile industries, construction and tourism companies and some manufacturing workers, the paper said.

“The economic pain is shifting to the man on the street,” said Maxim Oreshkin, head of research at OAO Rosbank, in a telephone interview. Oreshkin said he expected the consumer sector would contract in the first quarter of 2009 as the impact of layoffs works its way into consumer spending.

Manufacturing Prices

In November, prices that manufacturers pay declined for the first time in a decade, while the prices they charge dropped for the first time in the survey’s history.

“Reflecting the rapid deterioration in the activity profile and weakening commodity prices, inflationary pressures eased significantly,” Fedotkin said.

The annual inflation rate reached 14.2 percent last month, compared with the government’s official year-end forecast of 11.8 percent.

The PMI is derived from indexes which measure changes in output, orders, employment, suppliers’ delivery times and stocks, according to VTB.

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President Medvedev on Business Tour of Latin America

The Russian President Dmitry Medvedev starts his tour of Latin America. He is going to take part in the APEC summit in Peru, and then visit Russia’s key partners in the region — Brazil, Venezuela and Cuba. This tour was initially planned as demonstration of Russia’s growing role in the region, which was previously considered the U.S. backyard. But the financial crisis and falling oil prices made Moscow adjust its grandiose plans to the current state of affairs. According to the information of Kommersant, the majority of large-scale projects, including a gas pipeline through South America and an oil consortium in Venezuela are either cancelled or will be realized in a different form.

The second coming

The tour, which Russian President Dmitry Medvedev starts today, will be the greatest in his term in office — it is the first time that he is going to visit four countries, which do not border on Russia. Mr Medvedev will surpass even his predecessor’s Latin American achievements – Vladimir Putin paid four visits to the region (to Brazil, Cuba, Mexico and Chile), but he never toured such a big number of countries simultaneously. During his tour Dmitry Medvedev will visit Peru, where he will take part in the APEC summit, and then he will pay visits to Brazil, Venezuela and Cuba.

Moscow pins high hopes on this trip. “Cooperation with the region has been developing. In recent years we have not simply returned to Latin America, we have entered the region anew. The present stage of cooperation can be of a larger scale, compared with the Soviet times,” a source with the Russian Ministry of Foreign Affairs told Kommersant. “Latin America has already ceased to be the U.S. backyard, now the region conducts its own policy, which gives Russia an opportunity to solidify its positions there.”

Thus, Dmitry Medvedev’s tour was planned to demonstrate that in Latin America Moscow can operate as successfully as the USA does in post-Soviet territories. Russia decided to ensure its ambitions with demonstration of its military power in close proximity to the USA — in September Russian strategic bombers Tupolev Tu-160 visited Venezuela, and this time a Russian squadron, headed by battle cruiser Pyotr Velikiy, Russia’s flagship, will approach the Venezuelan coast. The squadron will hold exercises with the Venezuelan fleet, with Dmitry Medvedev and the Venezuela’s President Hugo Chavez watching them.

A bulk of plans

Russia has serious business interests in the region. Russian Deputy Prime Minister Igor Sechin has been actively lobbying them in recent months: since July he has visited the region three times already (according to the information of Kommersant it got from sources in the Russian Government, he will accompany Dmitry Medvedev). During Mr Sechin’s trips, a lot of projects were announced, where Moscow was going to participate. The largest of them is the Russian-Venezuelan consortium, where Venezuelan state-owned company PDVSA is planned to have the controlling interest, with five Russian companies (Gazprom, Rosneft, LUKoil, TNK-BP and Surgutneftegaz) owning the rest. During his latest visit Mr Sechin stated that the Russian share will be represented by the National Oil Consortium, registered by Rosneft on October 8, where each company will receive 20%. According to the initial plan, the consortium would get a permit to develop fields in Venezuela, and then it would start operating in the entire Latin America. Another large energy project with Russia’s participation was going to be a gas pipeline from Venezuela to Brazil.

Another promising project for Moscow was Venezuela’s purchasing Russian arms. In the arms sector the total sum of contracts between Russia and Venezuela has been over $4 billion — the largest of them were concluded in 2005. Sources of Kommersant with the Russian military-industrial complex said that during his visit to Moscow in July Hugo Chavez showed interest in purchasing 20 Tor-M1 and Tor-M2E short-range surface-to-air missile systems, three or four 636 submarines, 12 Ilyushin Il-76 and Il-78 strategic air lifters, 24 Sukhoi Su fighters, as well as tanks and infantry fighting vehicles. Rostehnology head Sergey Chemezov, who visited Venezuela with Igor Sechin in September, confirmed Caracas’ interest in the majority of these deals. Signing these contracts could bring Russia over $2 billion.

Crisis talks

The financial crisis and falling oil prices, which affected both the state budget and businesses, made Moscow adjust its grandiose plans to the current state of affairs. Because of lack of liquidity, negotiations for many projects, which were under way till autumn, were frozen. “Now it is more lucrative for Russian companies to invest in Latin American projects than in the development of hydrocarbons in Russia,” RusEnergy expert Mikhail Krutikhin told Kommersant.” “The crisis and unfavorable situation in the hydrocarbon market may significantly influence the profitability of projects, which used to appear lucrative.”

According to the information of Kommersant, this is the reason why heads of several Russian leading energy companies are not going with President Medvedev to Latin America. Sources of Kommersant with the Russian Energy Ministry said that TNK-BP Executive Director German Khan and Gazprom CEO Alexei Miller will not accompany Dmitry Medvedev during his tour (the latter will be substituted with Deputy Chairman of Gazprom’s Management Committee and Director General of Gazprom Export Medvedev Alexander). Sources of Kommersant with the Russian Government are only sure that LUKoil head Vagit Alekperov will be included into the delegation.

Negative trends affected mainly large-scale projects, which demand big investments. According to sources of Kommersant with Gazprom, the monopoly’s representatives are not planning to sign any contracts for a gas pipeline across South America. “Constructing a pipeline will take five or seven years, but since the project is connected with big investments, it is still being drafted. The crisis will shift the launch of the project by a couple years —Gazprom now has problems with financing. So the project’s realization can be expected in 2018 only,” Arbat-capital expert Vitaly Gromadin told Kommersant.

The outlook for the Russian-Venezuelan consortium is unclear too. According to interlocutors of Kommersant, during Dmitry Medvedev’s visit to Caracas documents, defining the project’s configuration, are to be signed. Sources of Kommersant are sure that all projects that Russian companies are realizing in Venezuela will be introduced to the consortium. It need be reminded that TNK-BP and PDVSA have an agreement for studying and certifying some deposits. Gazprom has licenses to develop several gas fields, and it has already begun drilling rigs. According to interlocutors of Kommersant, Surgutneftegaz will be involved as a liquidity source mainly.

Sources of Kommersant are sure that from now on the National Oil Consortium will represent the interests of Russian companies in Venezuela, with Igor Sechin being in control of the body. However, the question whether the consortium will receive new fields remains open.

The outlook for arms contracts is even gloomier. Sources of Kommersant with Rosoboronexport say that negotiations for many of the earlier outlined matters (including infantry fighting vehicles and submarines) are conducted, but one should not expect signing any contracts. Things stand no better in civil industries. According to interlocutors of Kommersant, a contract for leasing two Ilyushin Il-96-300 airliners is drafted. In addition, a possibility of concluding a contract for leasing Tupolev Tu-204 will be discussed, but the quantity of these planes has not been defined yet. “It is possible that negotiations of the two presidents will change something,” the interlocutor of Kommersant expressed a faint hope.

From experts’ viewpoint, big arms supplies to Venezuela are unlikely in the near future. “Speculation about Venezuela’s purchasing arms on credit showed that this oil-producing country has financial problems. More to the point, such speculation began when oil cost $150 per barrel, and now its price is below $50,” expert with the Centre for Analysis of Strategies and Technologies Konstantin Makienko told Kommersant. “Historically, there is correlation between oil prices and the arms market’s capacity: the higher the price, the larger the market. Prices have plunged, and the market has dwindled.”

The majority of experts share the view that, given the financial crisis and plummeting oil prices, Russia will simply lack resources - both economic and geopolitical - to realize its ambitious projects in Latin America. Under such circumstances countries that do not depend on oil price fluctuations and that possess big funds – mainly China – have far better chances to promote their interests in the region. This weekend, Chinese President Hu Jintao finishes his tour of the region.

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The Rouble, the Dollar and where Russian Economy floats

As all the attention turns to the Rouble and whether or not it is going to be devalued, sight seems to be turning from what is actually happening with the Russian currency and what other currencies this relates to, as well as what the recent currency movements actually represent in terms of the financial chaos the world is still battling.

Its not a good time to be thinking about the Rouble. Over the last couple of months it has slumped from 23.10 to the U.S. dollar in early August, to more than 27.40 in Mid November. It is also down against the Japanese Yen. But against other currencies, including the Euro and the Pound the Rouble is actually higher.

There are four key factors which are usually pointed to in explaining the fall against the U.S. currency in particular, all of which interact with the others. First there has been the capital outflow from Russia, which the World Bank sees as being worth about $50 Billion for 2008, as the global credit crunch forces global investors to pull out of higher risk environments to keep their dollars – and that’s what they are – at home, where they can get them ASAP if called upon. Then there has been the reduced inflows to Russia since mid year as oil has slumped from $147 BBL in June to about $50 BBL now. To go with this has been the steady reduction in GDP growth forecast as Russia battens down for a looming global recession, with Russian companies lowering their forecasts and shedding employees, and consumers starting to show signs of tightening their belts. Finally there has been the need for Russian corporate borrowers to refinance borrowings made internationally with domestic sources (read Russian government support). Those borrowings have seen companies gain access to Russian Government funds, in Roubles, but need to convert these into dollars to pay out old loans – pushing the Rouble down against the Dollar.

All of these factors are real enough, and all of them compound each other. For example the strengthening U.S. dollar caused by global investors pulling their dollars in, causes everything priced in the dollar – energy and commodities in particular - to decline, and that means less flowing into Russia. The less flowing into Russia, means downward pressure on Russia’s GDP growth, and adds to companies in Russia paring back on capital expenditure and growth plans. In an environment where global interbank rates have gone haywire, the Billions of dollars borrowed internationally by Russian companies, when things were sunnier, have looked less worthwhile, and considerably more expensive than when they were first taken out.

Its no wonder that everyday Russians have taken once again to buying dollars on the streets of Moscow. But the real story is the strength of the dollar and what is underpinning it, rather than the slide of the Rouble. And what is happening behind the dollar needs to be considered closely, over both the short and longer terms, as the Government is believed to be mulling a Rouble devaluation. In short, what is happening with the U.S. dollar is an expression of alarm about what is happening with the global financial system, and the U.S. economy rather than a vote of confidence. The rising U.S. dollar is a barometer of the likelihood of further near term global financial chaos.

What is happening with the U.S. dollar reflects the gaping holes ripped into the balance sheets of what were some of the worlds preeminent financial organizations less than a year ago. They have haemorrhaged money, largely on investment grade rated derivatives. The money they have lost leaves these organizations needing to raise capital simply to continue operations, to drastically reduce their lending – best shown by the stubborn refusal of $USD Libor rates in particular, and interbank rates in general, to return to something akin to where they were about 18 months ago – and for major governments around the world to nationalize, or part nationalize their banking systems, in addition to massive bank bailout and guarantee schemes. They desperately need money, meaning they are often bailing out of quality assets elsewhere to have the money, and in U.S. dollars, easily accessible and to regrow their operations in the worlds largest financial market – The U.S.

Global Central Banks flooding the global banking system with cash hasn’t yet been able to regenerate lending to any significant degree. Not even when banks are now finding government representatives on their boards, acutely aware of the need for a resumption of lending for the wider economy. Not even when governments commit to underwriting such lending. There is a great fear in the market of a need to access to billions, if not trillions of dollars, at notice so short that lending the money short term isn’t seen as a suitable option. Even where the counterparties to such loans are as certain as can be possible in todays environment of still being there when the loan gets called in. Financial institutions are keeping their cash on their balance sheets and they are keeping it in dollars.

A large part of that unknown stems from Credit Default Swaps, or CDS, and its cousins the Collateralized Debt Obligation, or CDO, and the synthetic CDO. Described by no lesser luminary than Warren Buffet as a ‘financial weapon of mass destruction’ they are still surprisingly poorly known to the general public. What they effectively represent is a situation where buyers of a CDS – invariably large financial institutions – make payments to sellers, in exchange for the seller having to making a payoff if an underlying financial instrument defaults. In the circumstances that have unfolded in recent years they have been popular investments for a range of organizations, including numerous utilities, local governments, and risk averse investors around the world, because the payments made by the buyers were constant and low risk, and the risk of having to make the payoff for default was considered remote. They were invariably given an investment grade rating by global ratings agencies.

A Collateralized Debt Obligation is a financial product based on an asset, where the asset is an income stream (of the type being made by buyers of CDS to sellers). To create synthetic CDO’s all that was necessary was to divide up the CDOs into groups which would enable buyers of CDOs to buy into a spread of payments from a range or portfolio of different companies rather than just one. Unlike normal CDOs the synthetic variety didn’t need to own an underlying bond or equity.

The threat that these still represent to the global financial system stems from two factors. One is the sheer scale on which they were sold, with estimates ranging from $500 Billion to $2 Trillion. Nobody knows for sure, as its been an almost completely unregulated market. The wider CDS and CDO markets are estimated to be worth as much as $40-50 Trillion.

The other threat stems from the companies that these default swaps were based on, and the way that many of them are structured. The companies involved represent some of the largest, and what were seen more than a year ago as the safest companies in the world. Companies that were then seen as being a very remote chance of defaulting – think Freddie Mac, Fannie May, American Insurance Group, Ambac, MBIA, Countrywide Financial, Lehman Brothers, and Bear Stearns, to go with major corporates such as GM and Ford, and even international institutions such as Icelandic Banks – which have now either passed into history or which are fending off the prospect, remain parts of the portfolio for numerous synthetic CDOs.

The way that the synthetic CDO is often structured means that when an ‘event’ – which is often the default of a number of companies from a portfolio, often more than 100 companies - occurs the sellers are looking at paying off, with the size of the payoff varying according to the number of companies which are defaulting. As an example - and a regular one - 33% when, say, 7 companies from the list are in default, 66% when 8 companies are in default, and complete redemption when 9 companies from the list are in default. It is this factor which is currently driving the need for companies and large investors in these securities to need large U.S. dollar volumes easily accessible. With a significant number of these companies having been nationalized or defaulted, every additional company failing makes it more likely that investors in synthetic CDO’s are going to have to start making payments to those who sold them. At the point at which this begins to significantly occur there could be an avalanche of redemptions – and that point may be close, with the corporate world pricing in a major, possibly deflationary, downturn, and significant large corporate players – start with GM and Ford, but watch American and British property developers and builders, and don’t discount the possibility or more financial failures in North America or Europe, with Citigroup’s massive cutbacks this week a sign of just how bad things are - fighting for their very existence.

And its this prospect which makes the short term management of the Rouble, and the capacity of the Central Bank of Russia to defend it from within a policy framework over the short and longer term, increasingly problematic. With bond yields currently spiking, reflecting the market pricing in a greater risk of defaults, the need for those who have invested in synthetic CDOs, in particular, to react to the same risk – corporate default – means that they simply have to have U.S. dollars nearby. At this point every successive corporate failure emanating from Europe or North America, increase the risk of massive sudden capital flows.

What happens the day after they start occurring is essentially anyones guess. The longer term outlook for the U.S. dollar has to factor in a massive current account deficit, a massive budget deficit, and a U.S. treasury which now needs to add to its servicing requirement the bailouts for Fannie Mae and Freddie Mac, amongst others, and will soon be needed to fund whatever fiscal stimulus the incoming administration decides upon to for the U.S. economy. So while those managing the Rouble today need to think about how to defend it against a rising U.S. dollar, they also need to keep in mind how they may need to come back the other way if the unthinkable happens.

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Russian economic crisis - The shock of the reversal

There’s no denying it any longer. Russia’s long economic boom is finally over.

On Nov. 18 the World Bank became the latest organization to slash its forecast for Russia’s gross domestic product growth next year, from 6.5% to just 3%. That came on the heels of the International Monetary Fund, which has also been scaling back its Russian GDP growth forecasts, most recently from 5.5% to 3.5%. Many experts are even gloomier, with some predicting that Russia’s economy could actually go into recession next year.

“I see no way you can achieve 3% growth next year,” says Anders Aslund, senior fellow at the Peterson Institute for International Economics in Washington. “We are seeing a rapid deterioration in everything: the banking system, real estate, construction, the metallurgical sector—and, of course, the oil price.”

Drastic Turn of Events
Although part of a global phenomenon, the slowdown in Russia is especially sudden and shocking. It comes after years of momentous economic growth, averaging 7% since the beginning of the decade. As recently as the first half of this year, Russia’s economy grew by 7.8% from the previous year. And until recently most ordinary Russians seemed oblivious (, 10/24/08) to the deteriorating economic news.

Yet the severe impact of the global crisis on Russia’s financial markets is becoming increasingly apparent. The banking sector is in turmoil, while the stock market has been among the worst affected in the world, losing 75% of its value in the past six months. The ruble has lost 17% of its value against the U.S. dollar since August.

Even so, the true extent of Russia’s economic problems is only now being acknowledged at an official level. “Today it is clear that the crisis is spreading, unfortunately from the financial sector into the sectors of the real economy,” Russian President Dmitry Medvedev admitted on Nov. 18.

A Daunting Scale
In sector after sector, corporate announcements about job losses, pay cuts, and production cutbacks show that the scale of the economic crunch is far more serious than most people had previously understood. On Nov. 19 Russian carmaker GAZ (GAZA.RTS) revealed it was introducing a three-day week, in response to slumping demand for vehicles. A day earlier, leading steelmaker Severstal (CHMF.RTS) announced it had slashed production by 50% since the summer and was deferring most of its $8 billion investment program for the next three years.

Just a few days before that, leading agricultural producer Razgulyay (GRAZ.RTS) announced it was sacking 2,200 members of its staff and cutting its investment by $190 million next year. “The situation is grim, and getting grimmer,” says Chris Weafer, chief strategist at Russian bank Uralsib (USBN.RTS). “Until now, most people didn’t think it would have an impact on their lives. Now the reality is beginning to dawn on them.”

According to Russia’s labor ministry, as of Nov. 13 some 3,079 Russian companies had announced plans for job losses, totaling 99,000. That’s more than double the number of job losses announced just two weeks before. Companies in Moscow also are cutting employee pay, by anywhere from 1.5% to 10%, according to Moscow city officials.

The cutbacks spell even more gloom for consumers and businesses, which are already reeling from the dearth of credit. Bank lending has practically ceased. In frank comments to foreign investors in Moscow on Nov. 18, Joerg Bongartz, the chairman of Deutsche Bank Russia (DB), spelled out the scale of Russia’s banking woes. “We have a completely dysfunctional [interbank] market: There is no confidence, no transparency, and a lack of liquidity,” he said. “Borrowing is a very expensive pleasure, if it is at all possible.”

Falling Car Sales
Nothing indicates the impact of the credit squeeze more dramatically than the car market. Just a few months ago analysts and investors were celebrating phenomenal growth in car sales (, 7/11/08), which were up by over 40% in the first half of the year. But sales have fallen for the past three months, with a decline of around 14% now forecast for next year, according to the Association of European Businesses in Moscow.

The sudden slowdown wasn’t totally unforeseen, of course. Even during the boom years, it was obvious to everybody that Russia’s growth was fragile. With energy and metals accounting for some 80% of the country’s export revenues, any major decline in commodities prices was bound to take a heavy toll. As the global economy heads into recession, commodity prices have indeed tumbled dramatically. The price of oil, now near $50 a barrel, has plunged by almost two-thirds since July. Almost as serious for Russia has been a big collapse in metals: Steel prices have halved over the same period.

What few people could have predicted was that the commodity price collapse would coincide with a total closure of international financial markets. Even before the latest declines in commodities, many of Russia’s top companies were already broke, unable to refinance maturing international loans without massive assistance from the government.

Many had hoped that Russia would be able to weather the global storm, thanks to the strong financial position of the Russian government. The state has used the years of high oil prices to build up an impressive war chest of rainy-day reserves. At their peak earlier this year, Russia’s foreign exchange reserves were worth some $590 billion. They are still worth around $460 billion—equivalent to a quarter of GDP.

Devaluing the Ruble
But as the gap between the figures shows, Russia has been hemorrhaging these reserves at an incredible rate. Foreign reserves have already shrunk by $130 billion since the beginning of August, indicating massive flight from rubles into dollars.

In an effort to absorb some of the mounting pressure on the ruble, the Russian Central Bank announced a widening of the currency’s trading band on Nov. 12, in effect devaluing it by 1%. But that announcement caused dismay among many economists, leading to further calamitous falls in the Russian stock market.

The fear is that if the Central Bank falters in its defense of the ruble, there could now be a full-scale run on the banks and the currency. “There is increasing uncertainty,” says Natalia Orlova, chief economist at Russia’s Alfa Bank. “Confidence will remain very weak, because all the rubles injected into the banks will gradually be converted into dollars.”

Despite the gloom, foreign investors in Russia are putting a brave face on the crisis, emphasizing that it is a temporary setback. “It’s still a growth market, just not at the moment,” said David Thomas, president of Volvo (F) cars in Russia, at a conference for foreign investors in Moscow on Nov. 18. He said the expected downturn next year should be put into perspective, noting that Volvo’s sales in the country have increased fivefold over the previous three years. “It’s still a very, very important market. It hasn’t collapsed,” he added.

While everybody now recognizes that Russia’s economy is heading for a sharp slowdown next year, the hope is that growth will pick up again in 2010 and beyond. Some grounds for optimism come from the International Energy Agency, which predicts significantly higher oil prices in the medium term due to continuing supply shortages in the global energy market. Possible production cuts by OPEC (, 10/24/08) could also help shore up oil prices.

But with future trends in the global economy now more uncertain than ever, the timing of any recovery is a question nobody really knows the answer to. What’s clear is that for Russia’s suddenly suffering economy, any rebound will not come a moment too soon.

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Russia’s Severstal seeks state funds for refinancing

Severstal, Russia’s largest steel maker, is in talks with state bank VEB to refinance 75 percent of a $325 million bond due in February, 2009, Chief Financial Officer Sergei Kuznetsov said.

Kuznetsov said on Tuesday the refinancing would provide ‘an extra cushion’, and stressed his company had sufficient liquidity to re-pay the amount.

State-owned VEB, or Vnesheconombank, has been entrusted by the Kremlin with distributing a $50 billion rescue package to help Russian companies refinance a total $120 billion of Western loans by the end of 2009.

Kuznetsov also said Severstal ’s worldwide production is 50 percent below normal capacity.

Last month Severstal slashed production by 25-30 percent at plants in Russia, Italy and the United States.

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U.S. Ambassador Beyrl to improve business from Vladivistok

United States Ambassador to Russian Federation John Beyrle Arrives in Vladivostok
During the meeting John BEYRLE and Viktor GORCHAKOV discussed the plan of APEC Forum

VLADIVOSTOK, November 17, The United States Ambassador Extraordinary and Plenipotentiary to the Russian Federation John BEYRLE arrived in Vladivostok. This visit, which will last from 16th to 19th of November and will include Vladivostok and Yuzhno-Sakhalinsk, is BEYRLE’s first trip to the Far East since his assignment in May 2008, the public relations department of the US Consulate General in the Russian Far East reports. “I already visited the Far East when I was the US vice-Ambassador to the Russian Federation,” Jonh BEYRLE said. “And I tried to come back here as soon as possible after my assignment.

Relations between our countries depend very much on relations between Moscow and Washington. In my opinion, however, relations between nations form at the regional level. One of this visit’s main tasks is to look at the region’s current situation in order to understand how we can improve and develop relations between the Russian Far East and American states such as California, Washington, Alaska.” Right after arriving in Vladivostok on Sunday, on November 16 John BEYERLE went to “Leopard’s Land”, the World Wildlife Fund (WWF) visitor center in Barabash. After that he visited the final concert of the Fifth International Jazz Festival– again this year American party was glad to cooperate with the Primorsky Territory Philharmonic Society and helped Alvin Atkinson’s quartet to come to Vladivostok. As Mr BEYRLE noted in his welcoming speech, although the US is the home of jazz, it was Russia where he started taking great interest in jazz. Mr BEYRLE saw the exhibition “Eleanor Pray: “Letters from Vladivostok,” that had been recently opened in Arsenyev Museum: the city history is told in letters written by Eleanor Pray, the wife of “Smith’s American Store” manager, who spent 36 years in Vladivostok. John BEYRLE met the Chairman of the Legislative Assembly of the Primorsky Territory Viktor GORCHAKOV.

One of the questions discussed during the meeting was the plan of APEC Forum in Vladivostok. On the same day John BEYRLE held a meeting with representatives of the Russian companies cooperating with American partners. The agenda for November 17 includes visiting the Vladivostok commercial port and meeting the participants of the Russian-American exchange programs.

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Evraz seeks funding from VEB

Russian steel maker Evraz Group has requested a $1.8 billion loan from state bank VEB to refinance debt incurred to acquire Canadian steel pipe maker IPSCO, Vedomosti business daily reported on Tuesday.

The newspaper said another Russian steel maker, Mechel , had also prepared a request to VEB for a loan and that Severstal, the country’s largest steel maker, was considering a similar plan. It did not specify the amounts.

Vedomosti quoted several unnamed sources in the banking sector and close to the steel companies. Evraz and VEB declined to comment, it said. Evraz was not immediately available for comment when contacted by Reuters.

State-owned VEB, or Vnesheconombank, has been entrusted by the Kremlin with the task of distributing a $50 billion rescue package to help Russian companies refinance a total $120 billion of Western loans by the end of 2009.

The first payouts were approved last month. United Company RUSAL, controlled by billionaire Oleg Deripaska, secured a $4.5 billion loan to repay debt incurred to help buy a one-quarter stake in Norilsk Nickel.

Alfa Group, controlled by another billionaire, Mikhail Fridman, secured a $2 billion loan to help it pay back a loan to Deutsche Bank and rescue its stake in mobile phone firm Vimpelcom , which was used as collateral with the bank.

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Financial Crisis in Russia: the New Prospective

The global crisis is adding a new urgency to reforms towards political pluralism and competition in Russia.

When the financial crisis broke out in September, the Russian government quickly moved to reassure the business community that it had enough resources to prevent a meltdown. Announcing a multi-billion rescue package, Prime Minister Vladimir Putin remarked rather sarcastically: “We have been often asked in recent years: what do we need such large currency reserves for? To feel confident [in this crisis].”

Russia set up the so-called “stabilisation fund” in 2004 to sop up excessive oil-generated cash from the market and save it for a rainy day. As of August 1, the country had the world’s third biggest currency reserves — $595.9 billion. It is out of that pot that the government has promised to dish out more than $210 billion to support the banking sector and industry.

Many economists and industrialists agree that the injection of billions of dollars into the economy may ease the debt and liquidity crunch but they say the government strategy of building up such huge reserve funds instead of promoting growth was wrong and will aggravate the fallout of the current crisis on the economy. Deputy Prime Minister and Finance Minister Alexei Kudrin, the architect of the safety cushion policy, once compared himself to the biblical Joseph, who stocked up grain during seven fat years to feed his people over the next seven lean years.

Critics counter that while Joseph stored grain thereby encouraging production, Mr. Kudrin has been hoarding money taking it out of the economy and thereby slowing growth. As the government invested its currency reserves in the West in low-yield securities, Russian companies were forced to borrow from western lenders at a much higher rate. When the global crisis struck, Russian businesses owned close to $550 billion in foreign debts, which almost equalled the country’s hard currency reserves.

According to the critics, the government should have instead poured money into Russia’s still underdeveloped banking system to increase its capitalisation, which currently stands at just over 60 per cent of the country’s GDP, and enable banks to offer long-term credits at affordable interest. Had the oil windfall been used for investment to diversify away from over-dependence on oil and gas, it would have made the Russian economy more reliant on long-term Russian money, encouraged sustainable growth in non-oil industries and insulated the country from the U.S. contagion.

Penny wise and pound foolish

Mr. Kudrin’s penny wise and pound foolish policy meant Russia forfeiting a chance to build a robust manufacturing sector during the fat years and prepare the country better for the lean years ahead, independent economists say. Its 2009 budget will be in the red if oil prices dip below $70 a barrel as they did recently. The massive bailout effort now threatens to deplete the oil funds. This will jeopardise an ambitious programme of economic modernisation unveiled earlier this year when the government finally agreed to invest part of the oil money in infrastructure and high-tech sectors.

The crisis is bound to have a strong negative impact in the long term, the economists warn. Russian stocks have lost more than 70 per cent of their value since spring; the GDP growth plummeted from 7.6 per cent in January-August to 0.4 per cent in September. Net private capital outflows are expected to reach $20 billion this year, in stark contrast to the previous forecast of $40 billion in net inflow. Industries have started cutting jobs and people are spending less. The crisis threatens to wipe out the impressive economic gains of the past 10 years.

Russia’s leading economists and business lobby groups, including the Association of Russian Banks, the Russian Chamber of Trade and Industry and the Russian Union of Industrialists and Entrepreneurs, have been urging drastic changes in monetary strategies for years. But Mr. Kudrin successfully fended off all attacks. He is the longest serving Cabinet Minister who has not only survived three Prime Ministers — he was appointed Finance Minister in 2000 — but also exerted decisive influence on shaping the economic strategy in the last eight years.

Mr. Kudrin owes his fantastic survival, in the face of massive criticism, to one man, then President and now Prime Minister Putin, who firmly believes in the financial acumen of his long-time friend and ally. Mr. Kudrin’s story points to critical flaws in the system of “managed democracy” Mr. Putin set up during his eight-year presidency. He calls it “manual control.”

When Mr. Putin became President in 2000 after a decade of post-Soviet meltdown, he faced the Herculean task of pulling the country together, reasserting Central control and rebuilding the economy. The chaotic transition from the Soviet Communist system to a market democracy under his predecessor Boris Yeltsin had all but destroyed the institutional capacity of the state to govern. This convinced Mr. Putin that law and order must be restored before democracy was introduced step by step.

Mr. Putin brought the electronic media under the Kremlin’s control, cancelled elections of regional leaders, and marginalised opposition parties by tightening election laws and controlling financial contributions to parties from businesses. The Kremlin effectively removed political parties from the sphere of state governance. Centralisation of power helped Mr. Putin establish political stability and carry out painful reforms, and set the economy on the path of revival.

But as Russia moved from economic recovery to modernisation, the lack of political competition, absence of strong opposition parties and the presence of an obedient Parliament emerged as major hurdles to faster growth. The costs of “manual control” began to outweigh the gains. Corruption has grown to staggering proportions in recent years in the absence of effective parliamentary oversight and accountability of government officials.

Experts say Russians pay a 30-50 per cent “corruption tax” added to the price of all goods and services. President Dmitry Medvedev has just unveiled a new plan to combat corruption, but sceptics say the plan is likely to fail because its implementation has been entrusted to the law enforcement agencies, which are also deeply steeped in corruption. “These methods are useless when there are no external institutional checks and balances, such as a critical and independent media, independent courts, transparent government and fierce competition from political opponents,” said Georgy Satarov, a leading anti-corruption expert. Monopoly on power has stifled the contest of ideas and led to costly mistakes, analysts say. A sweeping reform of the Soviet-era social security net undertaken three years ago was necessary but was so badly prepared that it provoked large-scale protests, forcing the government to increase social expenditure, instead of trimming it. A pension reform launched in 2001 fell through and is being overhauled again.

Several years ago, the Moscow government decided to build a new ring road to cope with the growing traffic in the capital. Experts then warned that the road would not solve the problem of congested streets fanning out from the city centre to the outskirts in a star-like pattern, but the docile city legislature approved the project backed by Moscow’s powerful Mayor Yuri Luzhkov. The new road was laid at a cost of over $4 billion but it failed to unclog city streets. Notwithstanding this, the Moscow government is about to launch the construction of yet another ring road which, the experts predict, will be just as useless.

The Kremlin’s chief ideologist, Vladislav Surkov, compared Russia’s political system in which the main pro-government party, United Russia, dominates Parliament to a one-legged man and called for the establishment of another major party, “a second leg to which society can shift its weight when the first leg goes numb.”

Towards two-party system

Two years ago, the Kremlin started building a new two-party system with the establishment of a left-of-the-centre party, Fair Russia, to compete for power with the ruling right-of-the-centre United Russia. However, the effort to promote political competition suffered a setback when Mr. Putin threw his weight behind United Russia last year. This enhanced the monopolisation of power helping United Russia win a huge constitutional majority in the parliamentary elections in December 2007, while Fair Russia captured a mere 8 per cent of the vote, just enough to cross the 7-per cent threshold. In his first state-of-the-nation address this week, Mr. Medvedev called for liberalising political life, stating democracy “on orders from above” must give way to grass-roots democracy.

“I believe that the citizens of Russia today are far more ready for freedom in professional, social and political activity than they were at the start of the reforms,” Mr. Medvedev said proposing a raft of measures to encourage the “broad involvement of citizens, political parties and other civic institutions” in dealing with the challenges of “a new phase in the country’s development.”

The global crisis is indeed adding a new urgency to reforms towards political pluralism and competition in Russia, as the wasteful system of “managed democracy” becomes too costly to maintain when oil prices are falling.

A study commissioned by Mr. Medvedev’s think tank, the Institute of Contemporary Development, earlier this year showed that the Russian political and business elites think “managed democracy” no longer meets the challenges of modernisation and must be replaced with a full-fledged democratic system.

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RUSAL uses Kremlin to replace Potanin

United Company RUSAL is lobbying for the Kremlin to replace rival shareholder Vladimir Potanin as the power behind Norilsk Nickel (GMKN.MM), as the world’s largest nickel miner prepares to elect a new board of directors.

UC RUSAL, a 25 percent shareholder in Norilsk, said on Wednesday it wanted four government officials to join the board at Norilsk, giving the state a bigger say in the running of the mining giant, whose value has crumbled in the last six months.

“It will ensure the company can overcome a crisis in management, improve its financial situation, business development and the rise in value of Norilsk in the interests of all shareholders,” UC RUSAL Chairman Viktor Vekselberg said.

UC RUSAL, majority owned by billionaire Oleg Deripaska, is among the first beneficiaries of the Kremlin’s $50 billion rescue package for Russian companies struggling to refinance Western loans during the acute global liquidity crunch.

The $4.5 billion loan it received from state bank VEB to repay debt accrued to help acquire its stake in Norilsk comes with a caveat — UC RUSAL must use the shares as collateral and a government representative must join the board at Norilsk.

The company welcomed the idea on Nov. 5, saying it would weaken the position of Norilsk Chairman Vladimir Potanin. UC RUSAL and Interros, Potanin’s company, have clashed over management since UC RUSAL bought its stake in Norilsk in April. Norilsk’s Moscow-traded stock has plunged over 60 percent since peaking in May as falling nickel prices and the shareholder quarrel exacerbates the effects of the global financial crisis and investor flight from Russia.

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Andrew Sommers on U.S.-Russian Business

Speaking to Business Today Mr. Andrew Sommers, President of the American Chamber of Commerce maintained that American companies continue to be very interested in Russia, but that the problems stemming from the global credit crisis are impacting on Russian operations.

AS: I’ve heard of no one who has written off the Russian market or feels that the Russian market is somehow a different animal. But the situation is different right now. Its true all around the world and there’s an amount of uncertainty, and when there’s uncertainty people tend to hesitate.
RT: Is there an indication that the U.S. companies operating in Russia are experiencing difficulties because of the effect the current crisis is having on the Russian market?
AS: Because of the difficulty of access to credit, not by these companies, but by their Russian distributors, their Russian retailers, the Russian companies who purchase equipment and resell them to the Russian consumer, those companies, and they are substantial companies, are having trouble getting credit. Either the interest rates are higher now, or they can’t get as much credit as they wanted. The result has been that a number of companies are selling less goods in volume to the distributors because the distributors can’t get enough credit to purchase the original amount that they would have bought.
RT: Many argue that the current crisis doesn’t have the far reaching consequences that many say it does. Do you agree with that?
AS: I tend to agree with it. I think that the analysis of the so called crisis in the States has over emphasized the role of banks because it was the investment banks – a certain type of bank – that is viewed as being he ones which kind of went too far. There has been an impact on credit though, but probably not as severe, if this study, I am sure this study is done professionally the impact on credit has been less. But, at the same time, the consumers in the States are getting much more conservative, and maybe that’s somewhat of a good thing, even though it slows growth down, because Americans don’t save.
RT: Do you expect the U.S. sanctions against the Russian state owned arms trader, Rosoboronexport, to hurt the two countries bilateral ties?
A.S.: The damper on the business relations. If you look at these regulations they are pointed only at U.S. Government agencies. It doesn’t forbid U.S. companies from dealing with Rosoboronexport. But, companies get nervous when they see this, so that they kind of hold off. So I think you will have a temporary decline in the business of several, what I would call strategic, American companies, with Rosoboronexport.

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