RUSSIA
As in many other countries, in Russia the deep financial and economic crisis is likely to involve a greater tilt towards state intervention.
- The economy is forecast to contract by 5% in real terms in 2009, after growing by 5.6% in 2008, reflecting sharply lower commodity prices, and restricted access to external financing and reduced external demand. However, a recovery is expected from 2010, and annual growth is forecast at over 4% in 2011-13.
- Despite problems in the business environment, ample market opportunities have led to large inflows of Foreign Direct Investment (FDI). However, the Economist Intelligence Unit expects growth of FDI inflows to slow in the first half of the forecast period, and even by 2013, the stock of inward FDI will still be equal to only around 25% of GDP.
- The government is said to have pumped US$75bn into the banking sector since the advent of the crisis, to keep financial institutions afloat and to stimulate new lending.
- Second, the government helped by providing funds directly to borrowers. Large conglomerates in the manufacturing and resource sector, both private and state-owned, have been major beneficiaries of government largesse. Many were saved from defaulting on their international and domestic loans.
- And unlike the US, no major financial institution has gone bankrupt and a run on deposits was avoided. This is an even bigger achievement in Russia than elsewhere, since Russian savers were wiped out twice over the past two decades, first by hyperinflation in the early 1990s and then by the collapse of private banks and the ruble devaluation in 1998.
- With the price of Brent crude nearing US$60/barrel, the Russian stock market hit a seven-month high on May 7th and the ruble reached its strongest level against the euro-dollar basket since late January. Easing inflation gave the Russian Central Bank (RCB) scope to start cutting interest rates, which it did in April by reducing its benchmark rate from 13% to 12.5%.
According to the Economist Intelligence Unit Views Wire, Russia’s banking system has so far taken the global financial turbulence in its stride, unlike in 1998 when the system collapsed.
However, leading Russian bankers including German Gref, the CEO of leading bank Sberbank, and Alfa's Peter Aven point to the rising tide of bad debts which threatens to scuttle the banking system.
Standard & Poor's, the international ratings agency, has been concerned about the quality of banking sector credits and estimates that up to a third of Russian banks' assets may be classified as problem loans.
Moreover, data on problem loans needs to be taken with a degree of caution. First, the Russian accounting system differs from generally accepted Western standards. Second, the RCB took a more lenient approach to classifying nonperforming loans more recently, with new regulations taking effect on January 1st. But even under new rules, some of the banks that were heavily involved in consumer lending during the boom years are already looking at 20% of bad loans in their portfolios.
Consumer loans are a special source of concern, since the jobless rate in Russia has been climbing and one out of ten people in the workforce is already unemployed.
Debt restructuring has been stepped up as a defensive measure. Sources of funds for financial institutions have dried up, so that central bank auctions have become the only consistent funding source. Banks fear that, with their profits drained by the need to reserve against nonperforming loans—reserve requirements went up again on May 1st—they may be banned from taking part in central bank auctions.
An article on Russia's ailing economy from the Economist print edition says that not long ago, Russia proudly counted itself as one of the BRICs—with Brazil, India and China, the four emerging-market giants that were outgrowing the rich world. Yet it now makes more sense to talk of the BICs. With GDP shrinking by almost 10% in the year to the first quarter, Russia is in deep recession.
