The impact
of the international financial crisis on Russia
must be analyzed under several aspects: how
harder it was hit regarding other countries, given the
volatility of external investment flows and
Russia’s own stock market, since its risk is related
to the business climate created by economic policy decisions and political
issues; its dependence
on energy exports – oil and gas – currently
losing value in the international market and how much it affects the real
economy; and,
finally, how its consequences are felt in Russian
society.
STEEL INDUSTRY AND 5-DAY WAR
The first aspect can be seen in
two moments. In July
2008, while discussing the steel industry in Russia, Prime Minister Putin
accused the Mechel
Group, which deals in coal and steel, of selling
coal in external markets at lower prices than the
ones in Russia, evading taxes and creating
domestic scarcity which raised inflation. And
requested an investigation of the Federal Anti-Monopoly
Service on this company’s activities, which was extended to two others of the same sector, Evraz Holding and Raspadski Ugol; the three groups comprise more than 50% of Russia’s coal coke market1.
The reaction of the market and
its analysts was
swift: Mechel’s shares dropped 68% from their
peak in May 30th, and its ADRs in the New York Stock Exchange dropped 38%. Following
the trend, Evraz’s shares dropped 14% and
Severstal’s, 12%. Not even state-owned
companies were immune: Sberbank, one of the country’s largest banks, lost 8.9% and Rosneft, the state oil company, lost 5.2%. The RTS index (in US$) fell to 1952.96, a 22% loss since its peak in May 19th
(2457.92), and the MICEX index,
measuring interbank movement in Moscow,
dropped to 1494.11 points, the lowest since
November 2006. The second moment came with
the 5-Day War, in August, after the capital
of South Ossetia was invaded by Georgian
troops and Russia’s military reaction, which
extended beyond the border of both republics,
aiming to annihilate Georgia’s military
devices. This made Russia be regarded as the
aggressor by Western circles which did not
expect such a strong Russian reaction, nor its
decision to unilaterally acknowledge their independence.
The 5-Day War is still a matter of great
controversy. However, it caused ripples in the
financial market, even though market analysts
believe that the fall registered in the Russian
stock market and the flight of foreign capital
in the period immediately after the war were also
caused by a repercussion in the fall of international
oil prices.
The RTS index dropped below 1600 points and the Russian Central Bank estimated that US$5 billion left the country in August. In the final week of September, the RTS had recouped 23% of its losses, possibly as a reaction to government measures to face the impact of the international financial crisis in the country. In any case, this crisis was felt very strongly, due to the market volatility mentioned above, especially because foreign investors withdrew their stock market applications, which represented more than 50% of it; according to Peter Rutland (2), the amount withdrawn by these investors corresponds to US$74 billion, making the RTS and MICEX indexes plummet more than 60% and Bloomberg rate the RTS as the sixth worst performance in the 88 indexes it follows.
The drop in share value had a
serious effect on the
capabilities of some of the largest Russian companies,
run by the famous oligarchs, to honor
their foreign debts related to planned expansion
operations. The government decided to offer
them a credit line for the debts incurred before
September 25th due to expire by the end of the year. And it planned a broad action program, based on foreign
resources deposited in the
Central Banks and the amount of resources available
in the Reserve Fund and the National Welfare
Fund (3), aiming not only to keep the
stock market afloat, but also to ensure
liquidity and stability
to the banking system and, through it, the
necessary credit to finance the real sector of
the economy. In the first case, they changed the criterion for using the National Welfare Fund, diversifying its investments: 50% in publicly negotiated shares and 30%
in bonus. Previously, this Fund
invested its resources in low-risk international public titles.
Regarding the banking system, the government approved credit equivalent to
US$36.1 billion for the three largest state banks – Sberbank, Vneshtorgbank and Vneshe- conombank
– during 10 years at 7% yearly interest rates, which are to transfer it to
other banks and
companies. In the beginning of October, president
Medvedev announced supplementary credit
for the sector amounting to 950 billion rubles (4), equivalent to roughly a third of the capital of the entire banking
system, with a maturity deadline of at least 5 years. Once again, the substantive amount of this money – 750 billion rubles – would be transferred through the three banks mentioned; the rest would be sent to well-regarded private banks;
the infusion of state capital would be limited to 15% of each bank’s capital,
and its owners must contribute with at least 30% of
that amount.
In the first week of November,
the Vneshekonombank indicated the
first companies to receive the credit, amounting to US$7.8 billion, in the energy, steel, construction, transportation and
telecommunication sectors. At the same
time, the Central Bank reduced the demands on reserve requirements and raised
the guarantee on personal deposits
from 400,000 rubles to
700,000, and injected a considerable sum to
sustain the ruble’s value. As a result of these
measures, Russia’s international reserves dropped
to US$484.6 billion in October 31st, a loss of US$112.8 billion since the beginning of August, and the balance in the Reserve Fund dropped to US$134.6 billion in November 1st, compared to US$140.98 in October 1st.
INTERNATIONAL OIL PRICES
The second aspect is related to the fall in international oil prices, one of Russia’s main exports, at the same time that the income from taxes on oil drilling and exporting represents almost a third of the country’s budget income. On November 6th, Brent price had reached US$57,43, a 33,37% loss in a month (US$ 83,68). Russia’s budget prices oil at US$70/ barrel, and, according to the Finance Ministry, if prices go below this threshold, the budget will have to be remade. On the other hand, it is estimated that, with the price drop and the retraction of the world economy, Russian exports should be 20% to 40% lower in 2009, which will affect its growth rate, reducing it to 3% or 4% in that year. The IMF’s evaluation of the Russian economy lowered its GDP growth expectations from 7% to 6,8% in 2008 and from 5.5% to 3.5% in 2009. And even the Ministry of Economic Development reduced its growth estimative to 7,3% in 2008, 0,5% lower than the previous one.
BUSINESS SECTOR
So far, and here we reach the third aspect, the crisis has struck basically the business sector, and has not affected yet most of the population, away from financial markets: a VITSIOM poll (5) conducted on September (6) indicated that 25% of the interviewed stated that they had heard the expression “world economic crisis” for the first time. There is, however, information that some companies have begun to shed jobs and analysts predict that the crisis is just beginning in the country.
* Reprint from PANORAMA OF THE INTERNATIONAL CONJUNCTURE - Information bulletin by the group for conjuncture analysis - no 40 - year 10 - dec 08/apr 09
LENINA
POMERANZ is coordinator for the theme area Russia at Gacint.
NOTES
This article had already been written when prime minister Vladimir Putin announced, on November 7th, a Plan to Overcome the Economic Crisis, with 55 items to guide the application of resources already allocated to that end. The plan’s goal is to recover the financial and industrial sectors in 5 months.
1. In this article, the sources used come from Russia’s Finance and Economic Development Ministries, Russia’s Central Bank, as well as several issues of BOFIT Weekly, Bank of Finland Institute for Economics in Transition and Johnsons Russia List.
2. RUTLAND, Peter. The impact of
the Global Financial Crisis in Russia .Bremen, Research Center for East
European Studies e Zurich. Center for
Security Studies. RUSSIAN ANALYTICAL DIGEST, n. 48/08, 17/10/2008.
3. Resulting from the
redistribution of the Stabilization Fund, created
with the resources generated through tax income on oil exports.
4. US$37.62 billion according to
the 25.25 ruble/US$ exchange rate at the end
of September 2008, BOFIT Russia Statistics.
5. Center of Public Opinion
Research for all of Russia, in the Russian abbreviation.
6. See RUTLAND, Peter, op. cit.
