On 7 October, the Russian Government adopted a new anti-crisis package. Apart from the trillions of roubles allocated for short-term and mid-term financing of the banking system, Russia’s largest banks will receive another 950 billion roubles (36.166 billion USD. 26.81 billion euros. 21.143 billion UK pounds) for the next five years and beyond. According to the Government and Central Bank’s plan, these funds are to filter down to smaller banks and businesses, which are in acute need of refinancing. However, the crisis of confidence, which has spread over the Russian credit market, may frustrate these plans.
Starting in the US mortgage market over a year ago, the financial crisis crept all over the world causing a chain reaction of distrust in the banking sector. To increase financial security, even those American banks that were not affected by the mortgage crisis tightened credit for home loans, not to mention European loans. At the same time, the European banks that are still afloat are afraid to refinance Russian banks and companies. The crisis of credit confidence is aggravating the continuing collapse of world stock markets to even a greater extent. Many debtors that went bankrupt took loans against securities, which are now in the possession of banks, having depreciated manifold.
Under such circumstances, the billions (and in Russia, trillions) poured into the leading European countries’ banking systems haven’t had the desired effect yet. The crisis of confidence is so strong that the leading financial institutions hesitate to credit smaller banks, which, in turn, cannot re-credit business, or do not want to risk it. Private customers suffer as well. Even Russia’s largest banks have raised interest rates or simply put a limit on issuing credits, especially mortgages. Unless the global banking system (including Russia), which is the monetary circulatory system for the non-financial sector of economy, resumes crediting business, the economic slowdown, and then the recession of economies stricken by the crisis of confidence, will become a reality.
In Russia, retail chains have suffered the most from the crisis of confidence. Anticipating an ever-growing consumer demand, they purchased large batches of goods on credit. With the credit stream running dry and consumers shying away, retailers found themselves on the verge of bankruptcy. The most notorious example is the situation with Russia’s largest cell-phone dealers. Euroset, the market leader, was rescued thanks to billionaire Alexander Mamut, who bought it for 1.25 billion dollars (32.834 billion roubles. 927 million euros. 731 million UK pounds). 75 percent of that sum will be spent on buying down the debt of Euroset’s former owners, instead of being transferred to their accounts. Two other large retailers, Svyaznoy and Tsifrograd, applied a similar scheme, exchanging a former owner for a large investor. As can be seen, there are still people and companies in Russia that have funds to invest.
To raise extra capital, cell-phone retailers had to start charging a commission for processing payments. On the other hand, new investors will help them survive the current crisis, and, then, they are likely to resell the businesses to mobile operators. As a result, Russia may convert to the European format where mobile operators sell phones themselves, with prices often discounted. Nevertheless, it is obvious that the crisis of confidence won’t be resolved that smoothly in other economic sectors. It is not only retail chains that have found themselves in debt; Russia’s largest companies are plagued by the same trouble. For example, Oleg Deripaska, the richest Russian according to Forbes, lost Canadian auto parts manufacturer Magna, which he purchased for 1.5 billion dollars (39.401 billion roubles. 1.112 billion euros. 877 million UK pounds) on credit. Mr Deripaska failed to pay off his debt, and Magna went to French creditor BNP Paribas.
Because of problems with financing, the GAZ group, part of Mr Deripaska’s empire, reported a one-week halt in GAZelles light commercial truck production. The assembly line stopped because of a drop in GAZ sales, which, in turn, was caused by the deteriorating auto loan market. Moreover, local GAZ dealers stopped making advance payments, which is why the car manufacturer now lacks working capital to buy auto parts. So, it all came around to where it started. For similar reasons, the Kamaz heavy-duty truck production plant announced a shortening of the workweek from six to four days through 6 December. A cut in car production against the background of the financial crisis is a global trend. Europe’s Opel, BMW, and Škoda, as well as General Motors and Chrysler in the US, all announced reductions in output.
The magnitude of the crisis is evident from the fact that Russia’s largest oil and gas companies, Gazprom, LUKoil, Rosneft, and TNK-BP, applied to the Government for credit to pay off their debts to western banks and maintain production. One might think their coffers were swollen with petrodollars. However, as soon as “black gold” sank below 90 dollars (2,364 roubles. 66.71 euros. 52.61 UK pounds) per barrel, Russian oil tycoons desperately turned to the state for help.
11 October 2008
Oleg Mityaev
RIA-Novosti
http://en.rian.ru/analysis/20081011/117672054.html (in English)
