Monday, 6 of April of 2020

Category » Uncategorized

A Thaw in Relations with Russia?

VOA report - Download (MP3) U.S.-Russian Business podcast

VOA report - Listen (MP3) U.S.-Russian Business podcast

US Vice President Joe Biden gave a hint to the Obama administration’s attitude toward relations with Russia at the International Conference on Security Policy in Munich, Germany on 07 Feb 2009.

Throughout eight years of the Bush administration relations between the United States and Russia have been steadily deteriorating, and occasional flare ups have caused a lot of friction, misunderstanding and frustration. In Munich VP Biden signaled a willingness to end the downward spiral. “It’s time to press the reset button,” he said. “And to revisit the many areas where we can and should be working together with Russia.”

Marshall Goldman from Harvard University, says Mr. Biden’s speech set a new tone for relations between Washington and Moscow.

“When you say ‘reset’ that means you clear the computer and that opens up all kinds of new opportunities and you’re not going to be held back by past commitments which have been controversial,” he said. “This provides an opportunity that maybe only a new administration could do because they don’t have to be held down by complications that arose under the past government.”

Russia is clearly against the Bush administration’s plan to put a missiles in Eastern Europe. Joe Biden: ”We will continue to develop missile defenses to counter a growing Iranian capability, provided the technology is proven and is cost effective, and we will do so in consultation with our NATO allies and with Russia.” Robert Legvold from Columbia University says it’s a departure from the Bush administration’s view to go ahead with the defense shield whether it’s feasible or not. “The basic position is we’re not going forward with this unless it’s technologically feasible and unless it’s something that we can get agreement with at least the allies,” he said. “And in doing so, we also want to consult the Russians… and  achieve an outcome that is acceptable to Russia and one that Russia buys into.”

Senior Russian officials, including Deputy Prime Minister Sergei Ivanov, reacted positively to the vice president’s speech. But in an interview with the Russia Today television program, Ivanov was more cautious.

“From my previous experience - I’m 56 already - I saw a lot of thaws,” he said. “I saw a lot of good intentions which ended nowhere. I hope this time it won’t be the case.”

Business executives are watching this development with hope. Most agree that now is the time to start rebuilding U.S.-Russian political and business relations on the positive tone set out by U.S. VP Joe Biden.

Do your comment

Russian Big Four oil companies accused of price fixing

The Russian Federal Anti-Monopoly Service (FAS) has launched a suit against the country’s leading oil companies, Rosneft, Lukoil, Gazpromneft and TNK-BP,  accusing them of price fixing on the petrol market in late 2008 and early 2009.

FAS director Igor Artemyev says all four companies have failed to lower fuel prices to consumers despite the three-fold collapse in the oil price. “In my opinion the companies have challenged the government by increasing wholesale price by 30-60% in February. As the governments representative, today we accept this challenge” Artemyev says.

In December 2008 the FAS fined the four companies for setting high prices for petrol. On that occasion the fines were the lowest possible (Rosneft was fined 1.5 billion roubles, Lukoil 1.44 billon roubles, Gazpromneft 1.3 billion roubles and TNK-BP 1.1 billion roubles). The FAS warned the Big Four that if petrol prices increase again, new cases would follow immediately and penalties will be many times more.

The slump in oil prices in 2008 led to the oil price falling from US$147 in July to just US$40 in December, but petrol prices in Russia did not fall at the same speed, recording the biggest decline in the first month of winter – by 7.3%.

Do your comment

SEC Charges Moscow-Based Broker Dealer For Violating Registration Requirements

The Securities and Exchange Commission today charged a Moscow-based unregistered broker-dealer for registration and reporting violations, alleging that it solicited institutional investors in the U.S. to purchase and sell small cap stocks of Russian companies without registering as a broker-dealer with the SEC or meeting the requirements for an exemption.

“Today’s action demonstrates that the Commission will closely scrutinize the activities of foreign broker-dealers soliciting investors in our domestic markets,” said Scott Friestad, Deputy Director of the SEC’s Division of Enforcement. “The broker-dealer registration and reporting requirements ensure that foreign entities soliciting business in the United States provide the levels of disclosure and transparency required by U.S. law to protect American investors.”

In addition to instituting administrative proceedings against OOO CentreInvest Securities (CI-Moscow), the SEC charged its registered U.S. affiliate, CentreInvest, Inc. (CI-New York) and four individuals: CI-Moscow’s former executive director Dan Rapoport, CI-New York’s former managing director, FINOP and CFO Svyatoslav Yenin, CI-New York’s former head of sales Vladimir Chekholko, and CI-New York’s chief compliance officer William Herlyn.

“It is incumbent upon foreign broker-dealers and domestic broker-dealers working with them to familiarize themselves with, and take all necessary steps to comply with, the appropriate registration requirements required by U.S. law before soliciting business from American investors,” said James Clarkson, Acting Regional Director of the New York Regional Office. “Today’s action is a significant step in ensuring that these provisions are properly followed.”

In the administrative proceeding, the SEC’s Division of Enforcement alleges that from about 2003 through November 2007, CI-Moscow and Rapoport solicited investors in the U.S. both directly, and indirectly, through CI-New York, Yenin, Chekholko and Herlyn. CI-Moscow and Rapoport were not registered as a broker-dealer as required by law, nor did they meet the requirements for the exemption from registration for foreign broker-dealers.

The SEC’s Division of Enforcement also alleges that Yenin and Herlyn were responsible for the filing of amendments to CI-New York’s broker-dealer disclosure form that failed to disclose CI-Moscow and Rapoport’s control of CI-New York, or that the license of the CI-New York’s parent company had been revoked by the Cyprus SEC. The Division further alleges that CI-New York either failed to maintain business-related emails, or failed to produce them at the request of the Commission’s staff as required by law, and that Yenin was responsible for CI-New York’s failure to maintain these business-related e-mails.

The SEC’s Division of Enforcement is seeking cease-and-desist orders, orders directing respondents to provide accountings, pay disgorgement and financial penalties, and orders imposing any remedial action appropriate in the public interest, including, but not limited to, bars from association with any broker or dealer, or revocation of registration. A hearing will be held before an Administrative Law Judge to determine whether the allegations of the Enforcement Division in the SEC’s order are true, and if so, what relief is appropriate. The Commission ordered the Administrative Law Judge to issue a decision not later than 300 days from the date of service of the order.

Do your comment

Russian Economy is Shrinking Fast

Today, Russia’s State Statistics Service revealed the GDP growth figures for the third quarter. And – lo and behold – they are “surprisingly bad”, “below market expectations”, etc. (There are many reports in The Moscow Times, Bloomberg and Reuters).

You might think that by now economists would no longer be surprised by the stream of dire economic news. For anyone who has been closely following what has been happening in Russia’s economy over recent weeks, it’s increasingly obvious that it has essentially stepped off a cliff. As Danske Bank economist Lars T. Rasmussen writes in a research note: “The question is whether there will be any economic growth at all in Russia next year.”

“But surely 6.2% growth in the third quarter isn’t so bad?” I hear you say. Think again. That figure is the year-on-year change, not the quarterly change. In other words, it includes the rapid growth that took place in the first half of this year and the fourth quarter of 2007, when Russia’s GDP was still growing by 8%. The month-on-month trends show that output is already contracting. Russia’s GDP fell by 0.4% in October, according to government officials.

Now, the signs are that production in Russia is not simply stagnating: It is in fact plummeting like a stone. Industrial output, generally an early indicator of GDP trends, has been falling over recent months. And the output decline appears to have accelerated dramatically in November and December. According to the latest government figures, cited in the Moscow Times article, manufacturing production will have plummeted by an additional 10% by the end of the year.

The latest business surveys also confirm the dramatic speed and scale of the economic deterioration. These show that the situation facing Russia’s service industries (not recorded in the industrial output figures), is even more dire than in manufacturing.

The gloomy official figures only confirm what has been apparent from anecdotal evidence for weeks. In sector after sector, Russian companies are reporting sharply declining orders and massive lay-offs. Construction, banking, metallurgy and the automotive industry are all in deep and obvious crisis. Russian railways has reported a 20% decline in freight volumes, reflecting the nationwide slump in industrial production. As for the oil industry: that was reporting declining output and insufficient funds months ago, long before the financial crisis escalated and the oil price plunged.

The risk of a GDP contraction has already been highlighted by longtime Russia watcher Anders Aslund, perhaps the first economist to warn of the current Russian economic slump. In October Aslund suggested that Russia’s GDP could fall by 5% next year.

Now those views, which once appeared heretical and extreme, are becoming mainstream. Barclays Capital now predicts “acute declines in output in the first months of the year”.

Nouriel Roubini, a US economist who became famous for accurately predicting the global credit crunch, is also weighing in on Russia’s economy. He writes that the current global outlook “signals a sharp recession in advanced economies, and a very likely recession in Russia too”.

Meanwhile Bloomberg cites Alexander Lebedev, one of Russia’s top businessmen, saying that the economy would “definitely” go into recession next year, and that it is “quite possible” that it will contract by as much as 10%.

Even the dreaded “D” word is now beginning to be heard. In comments cited in The Moscow Times, leading Russian economist Evgeny Gavrilenkov warns that if the latest government figures are accurate, they mean that Russia is now heading into a “severe depression”.

Do your comment

Ruble exchange rate manipulation as key to weathering the crisis

During the nationwide broadcast by Prime Minister Vladimir Putin, he said that Russia would avoid “sharp jumps” in the ruble as it fell to the lowest level against the dollar in almost three years.

The ruble, which the central bank manages against a euro-dollar basket, on Monday had weakened to as much as 0.6 percent to 28.0908 per dollar, the lowest since March 2006, as the U.S. currency rose against the euro. The value of the ruble has declined by 16 percent since Aug. 1.

“We will not allow sharp jumps in the economy and in the exchange rate of the national currency,” Putin said in televised comments in Moscow on Thursday. “We will carefully use our currency reserves and other government funds, and if we carry out a balanced, considered and responsible economic policy, this money will be enough for us.”

The reserves have fallen 24 percent since reaching a peak of $598.1 billion in August as the central bank sold foreign currencies to prop up the ruble, Bloomberg reported.

Putin, who remains Russia’s most influential leader, fears that costs for the country’s economy as economic growth slows and the ruble weakens would be enormous.

Additional threats to the economy are falling profits in the energy, chemicals and metals export sector and the withdrawal of investment capital from the country, which has totaled about $190 billion since the start of August, according to BNP Paribas.

Experts say the government is taking unprecedented measures in the fiscal policy to reverse these negative trends.

“In 2008, the Russian central bank increased the refinancing rates six times. The last two changes of the refinancing rates amounted to one percent and were conducted on Nov. 12 and Dec 1, correspondingly. At the moment, the interest rate in Russia is 13 percent, among the highest in the developing countries,” said Anton Kozirev, general manager of Fibo St. Petersburg.

He added that from a Forex (foreign exchange) point of view, increasing loan rates could lead to a fall in consumer demand for goods, causing traders to sell the national currency resulting in further downward pressure on the ruble.

There are additional factors adding to this pressure.

“Among the most important are: monetary policy and macroeconomic factors such as the unemployment rate, retail sales and the level of inflation. Commodity price fluctuations (especially oil and gold prices), and the current political situation also have a big influence on exchange rates,” said Irina Kormilitsyna, senior analyst at Rosfinconsulting finance and analysis center.

Many investors are trying to sell the cheap currency they possess amid decreasing growth of the economy and the rise of the U.S. currency against the euro and ruble.

At the height of the 1998 crisis when Russia defaulted on debts of $40 billion and devalued the ruble, the mass selling of rubles for dollars became endemic. It wiped out the life savings of millions of people overnight and pushed the government to the edge of bankruptcy.

“Most likely people still haven’t forgotten those times when there was a ‘dollarization of the economy.’ Neither in Europe nor in other regions do people rush to throw out the euro, the pound or the franc in favor of the dollar, while here it’s a common reaction when a crisis appears, and it can only aggravate it,” said Yegor Susin, head of the analysis department at Alpari (Russia).

The Russian economy has expanded by seven percent a year since 1999 and may grow only one to two percent in 2009, Gary Dugan, Merrill Lynch & Co.’s chief investment officer, told Bloomberg.

While the ruble declined against the dollar, it appreciated 0.4 percent to 35.3450 against the euro. Those movements left it little changed at 31.3212 against the basket that the central bank uses to control its fluctuations. Hence, some experts have differing opinions about the ongoing decline of the ruble while agreeing that the destabilization of the ruble is out of question.

“Almost all current media reports talk about the ruble’s decline, but at the moment it is more honest to say that the U.S. dollar is rising. The central bank uses not only the U.S. currency, but a basket of dollars and euros to control ruble fluctuations, creating conditions for stabilizing it with such measures as intervening on the domestic currency market,” Susin said. He added that measures such as the expansion of the exchange-rate limits of the currency basket would limit the possibilities for speculation on the Forex market.

According to analysts, a weaker ruble may benefit Russian oil producers as they sell crude on a dollar basis and pay most expenses in rubles. Rosneft, Russia’s biggest oil producer, is cutting finance costs by paying back ruble debt with a cheaper currency.

“As crude oil prices are declining, the government cannot hold the ruble rate against the dollar at the current level, because it could be a blow to the economy and its competitiveness and could lead to the exhaustion of currency reserves,” said Susin.

However, the government plans further tax cuts from Jan. 1 for oil companies to help reduce domestic gasoline prices. Russian companies that fail to get funds through the banking system may be able to turn to the government for “a large scale” capital injection, Putin said.

Do your comment

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.

Do your comment

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.

Do your comment

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.

Do your comment

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.

Do your comment

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.

Do your comment