The 20082009 Russian financial crisis, part of the world Economic crisis of 2008, was a crisis in

the Russian financial markets as well as an economic recession that was compounded by political fears
after the war with Georgia and by the plummeting price of Urals heavy crude oil, which lost more than
70% of its value since its record peak of US$147 on 4 July 2008 before rebounding moderately in 2009.
According to the World Bank, Russias strong short-term macroeconomic fundamentals made it better
prepared than many emerging economies to deal with the crisis, but its underlying structural weaknesses
and high dependence on the price of a single commodity made its impact more pronounced than would
otherwise be the case.
[1]

In late 2008 during the onset of the crisis, Russian markets plummeted and more than $1 trillion had been
wiped off the value of Russia's shares,
[2]
although Russian stocks rebounded in 2009 becoming the
worlds best performers, with the Micex index having more than doubled in value and regaining half its
2008 losses.
[3]

As the crisis progressed, Reuters and the Financial Times speculated that the crisis would be used to
increase the Kremlin's control over key strategic assets in a reverse of the "loans for shares" sales of the
1990s, when the state sold off major assets to the oligarchs in return for loans.
[4]
In contrast to this earlier
speculation, in September 2009 the Russian government announced plans to sell state energy and
transport holdings in order to help plug the budget deficit and to help improve the nation's aging
infrastructure. The state earmarked about 5,500 enterprises for divestmentand plans to sell shares in
companies that are already publicly traded, including Rosneft, the countrys biggest oil producer.
[5]

From July 2008 January 2009, Russia's foreign exchange reserves (FXR) fell by $210 billion from their
peak to $386 billion as the central bank adopted a policy of gradual devaluation to combat the sharp
devaluation of the ruble. The ruble weakened 35% against the dollar from the onset of the crisis in August
to January 2009.
[6]
As the ruble stabilized in January the reserves began to steadily grow again
throughout 2009, reaching a year-long high of $452 billion by year's-end.
[7][8]

Russia's economy emerged from recession in the third quarter of 2009 after two quarters of record
negative growth.
[9]
GDP contracted by 7.9% for the whole of 2009,
[10]
slightly less than the economic
ministry's prediction of 8.5%.
[11]
Experts expect Russia's economy will grow modestly in 2010, with
estimates ranging from 3.1% by the Russian economic ministry
[12]
to 2.5%, 3.6% and 4.9% by the World
Bank, International Monetary Fund (IMF), and Organisation for Economic Co-operation and
Development (OECD) respectively.
[13][14][15]

Background[edit]
Russia is a major exporter of commodities such as oil and metals, so its economy has been
hit hard
[16]
by the decline in the price of many commodities. Russian stock market declined
significantly. Foreign investors have pulled billions of dollars out of Russia on concerns over
escalating geopolitical tensions with the West following the military conflict between Georgia
and Russia,
[17]
as well as concerns about state interference in the economy.
[18]
Those
concerns were underscored in July by Prime Minister Vladimir Putin's criticism of steel
company Mechelcollapsing the company's stock.
[19][20][21][22]
By September 2008, the RTS
stock index plunged almost 54%, making it one of the worst performing markets in the
world.
[23]
Russian involvement in the US subprime mortgage crisis contributed to the
volatility in Russia's financial system. The Russian Central Bank owned US$100 Billion
of mortgage-backed securities of the two American mortgage giants Fannie
Mae and Freddie Mac that were taken over by the US government. This investment most
likely will have to be written off.
[24]

Many analysts, including Andrei Illarionov, former economic policy adviser to then-President
Vladimir Putin, claim that in Russia the crisis in the stock market was deepened dramatically
by internal factors, including concerns over state interference in the economy fueled in June
by Putin's criticism of Mechel and the conflict over TNK-BP, lack of transparency in banking
and political risks associated with escalating geopolitical tensions following the 2008 South
Ossetia war in August.
[25]
Swedish Foreign minister Carl Bildt said on 17 September that the
current Russian financial crisis is "obviously more worrying" than the ongoing subprime
mortgage crisis in view of the political development in Russia.
[26]
Furthermore, Russia's
overt reliance on the oil and natural gas sector made it particularly vulnerable.
According to the Wall Street Journal and Gazeta.ru, as the Russian market declined in
September, conspiracy theories circulated in Russia among the leadership that the U.S.
government allegedly incited American investors to withdraw their capitals from Russia,
punishing Moscow for the recent war in Georgia.
[27][28]

Financial markets[edit]


Major Russian stock market RTS Index with S&P 500 and Oil Spot Prices. All data are in percentages to 1 May
2008 values. A Vladimir Putin criticises Mechel; B 2008 South Ossetia war starts; C Recognition of
Abkhazia and South Ossetia by Russia; D Alexei Kudrin "no systematic crisis" speech; E measures to save
major banks are adopted by the Russian government; F Global financial crisis of SeptemberOctober
2008; G PresidentDmitri Medvedev announced additional bailout financing
Stock markets[edit]
On 24 July 2008, Mechel's stock plunged by almost 38 percent after Russia's Prime
Minister Vladimir Putincriticized its CEO Igor Zyuzin, and accused the company of selling
resources to Russia at higher prices than those charged to foreign countries. The
comments, which raised fears of another attack similar to that made onYukos in 2004,
contrasted sharply with previous efforts by President Dmitry Medvedev to improve Russia's
reputation as an investor-friendly country.
[29]
On the following day, Mechel issued a contrite
statement promising full cooperation with federal authorities,
[29]
while share values
rebounded by nearly 15 percent. 28 July presidential aide Arkady Dvorkovich then sought to
restore calm, declaring that all parties would "act in a civilized way," and confirming that
Mechel was cooperating with antitrust authorities.
[30]
Just hours later, however, Putin
announced that Mechel had been avoiding taxes, by using foreign subsidiaries to sell its
products internationally. His renewed attack caused share prices to tumble once morethis
time by almost 33 percent.
[31]

On 16 September Russia's most liquid stock exchange MICEX and the dollar-
denominated RTS were suspended trade for one hour after the worst one-day fall in 10
years as Finance Minister Alexei Kudrin reassured markets there was no "systemic"
crisis.
[32]
Next day, trading was suspended for the second day in succession on Russia's
two main stock exchanges (MICEX and RTS) after shares fell dramatically, forcing
the Federal Financial Markets Service to intervene.
[33][34]
The simultaneous collapse of
money markets prompted reaction from the government and the Central Bank, while
Finance Minister Alexey Kudrin sought assurances from U.S. Treasury Secretary Henry
Paulson that the U.S. did not play politics with Russia in the crisis.
[27]

The crisis continued on 18 September, as trading was suspended for the third day in
succession on Russia's two main stock exchanges amidst fear of financial collapse. News
agencies are quoting Russia's finance minister Alexei Kudrin as saying trading on Russian
exchanges will not resume until 19 September 2008.
[35]
Officials at MICEX stock exchange
describe conditions in the Russian markets as "extraordinary"
[36]
Deputy Finance
Minister Pyotr Kazakevich asserted that "Russia is facing its worst stock market decline in a
decade mainly because of a confidence crisis rather than liquidity problems".
[37]

On 6 October the MICEX and RTS crashed by 18.6% and 19.1% respectively. The losses
forced the Federal Financial Markets Service to suspend the stocks three times. The
decreases in other world markets on that day were considerable, but less dramatic than in
Russia.
[38]
Trading on both exchanges was suspended on the next day; Russian companies
have augmented in price at London LSE.
[39]
On 8 October the MICEX and RTS plunged
14.4% and 11.3% respectively, trading on the markets was halted until 10 October,
respectively.
[40][41]
However, on 9 October MICEX trading resumed ahead of schedule, and
the stock market rose 14.7%.
[42]
On the next day the regulator, wary of crises in American
and Asian markets, decided not to open trading at all.
[43]

Money markets[edit]
The crisis in money markets was imminent since spring, when Central Bank of
Russia warned the public of a gradual contraction in bank lending due to unfolding world
liquidity crisis. However, the regulator preferred to combat inflation, raising the refinancing
rate and bank reserve contributions. 1 September hike in reserve rate alone withdrew nearly
100 billion roubles from the money market.
[44]
The raise coincided with a seasonal peak in
tax payments and left the banking system in a worse state of liquidity than that of August
1998.
[44]
A subsequent drop in rouble-to-dollar exchange rate and dollar-denominated prices
of Russian corporate securities forced investors to crowd out, worsening the positive
feedback loop. The interbank money market that traditionally relied on Russian corporate
stock as a collateral for the repurchase agreements, immediately imploded in what was
called "a crisis of trust" or even "elimination of trust":
[45]
when the borrowers defaulted on
loans, leaving lenders with impaired collateral, other banks stopped lending as a
precaution.
[44]

Money market crunch passed its first lowest mark 1517 September. 17 September the
government lent the country's three biggest banks, Sberbank, VTB
Bank and Gazprombank, 1.13 trillionrubles (US$44 billion) for at least three months to
boost liquidity;
[46]
the Central Bank lowered the reserve requirement.
[47]
This was followed
24 September by Central Bank loans to keep the current accounts afloat and prevent
a bank run. The regulators also raised the cap for deposit insurance from 400 to 700
thousand roubles (equivalent to 25 thousand dollars).
[48]
These actions served their short-
term purpose but failed to revitalize the money market: no bank was willing to lend for
longer than overnight.
[44]

17 November MosPrime interbank interest rate on rouble loans reached a record high of
22.67%, indicating another shortage of liquid funds as the bank clients transferred funds
overseas or paid taxes due. Rates on six-month US dollar forward contracts fluctuated at
4060%, short-term currency swaps averaged around 80% as the banks anticipated further
drop in exchange rates.
[49]

Bank failures[edit]
On 15 September the KIT Finance brokerage failed to pay off its debt, signalling problems
in Russia's financial sector.
[50][51]
On 8 October the Russian Railways and Alrosa agreed to
acquire a 90% stake in KIT Finance.
In the beginning of October Sergei Ignatyev, chairman of the Central Bank, announced
imminent bankruptcy of 50 to 70 banks.
[45]
Actually, in late August late November the
regulator has shut down only nine banks.
[48]
More smaller banks showing signs of distress
are allowed to operate, like the Moscow Mortgage Bank that defaulted on returning
individual deposits in November.
[52]
Regional banks, heavily dependent on individual
deposits, were in particular hit. A bank run registered in Bashkortostan in November caused
local crises. Three of the four worst affected banks were promised rescue by their
shareholders or third-party buyers; fate of the fourth one is yet to be decided.
[53]

Government intervention[edit]
Refinancing foreign capital[edit]


Sergei Ignatyev (Chairman of the Central Bank of Russia), German Gref (Chairman and CEO of Sberbank)
and Andrey Kostin(Chairman and CEO of Vneshtorgbank) at a meeting convened by President of RussiaDmitry
Medvedev dealing with economic issues in Russia on 18 September 2008.
On 18 September, Russian President Dmitry Medvedev ordered ministers to inject
500 billion roubles of funds from the state budget into the markets and pledged that the
financial system would receive "all necessary support".
[36]
On 7 October, Medvedev
announced an additional $36 billion for banks on top of the $150 billion approved in
September.
[54]

On 29 September, Vladimir Putin announced a government policy aimed at refinancing
Russian corporations that previously relied on foreign loans. Government
authorized Vnesheconombank as its principal agent in distributing state loans to these
corporations, amounting initially up to 50 billion US dollars, or 8% of Russia's foreign
currency assets. At the same time Putin recommended the Central Bank to
extend unsecured stabilization loans to Russian banks,
[55]
which was duly
implemented.
[49]
The policy was immediately dubbed "soft re-nationalisation" and criticized
for selective picking of "eligible" borrowers.
[45]
The 50 billion installment covers only the
current portion of 477 billion US dollars owed by Russian corporations to foreign lenders;
total assets of the government and the Central Bank combined are estimated at 550 billion
US dollars.
[55]

On 23 October, Standard & Poor's changed the long-term outlook on the sovereign credit
ratings of Russia from stable to negative, warning of the costs of bailing out troubled banks
and a rising risk of a budget deficit in 2009. It also lowered Russia's Transfer and
Convertibility (T&C) assessment to BBB+from A-. At the same time, the 'BBB+' long-term
foreign currency, the 'A-' long-term local currency ratings and the short-term ratings of A-
2 were affirmed.
[56]

By 13 November, Russian government spending to quench the recession reached
222 billion US dollars, or 13.9% of its GDP;
[57]
in November the state was spending its
reserves at an average 22 billion dollars a week.
[58]

On 8 December 2008, Standard & Poor's additionally lowered Russia's foreign currency
credit ratings to BBB (long term) and A-3. It also lowered Russia's Transfer and
Convertibility (T&C) assessment to BBB and the long-term local currency assessment
to BBB+. On the other hand, the short-term credit rating in local currency was left intact as
A-2. The lowering of credit ratings was caused by the sharp decline of reserves and
investment flow.
[59][60]
Standard & Poor's also launched a downward revision of Russian
municipal and corporate bond ratings.
[61]

Tax and state budget policy[edit]
See also: Federal budget of Russia
20 November Vladimir Putin announced government package of tax reforms. Corporate
profit tax rate (24% in 2008) is to be reduced to 20%.
[62]
Profit tax base will decrease for
companies investing in capital assets as the immediately recoverable depreciation
allowance is raised from 10% to 30% of the asset cost. There will be no change in value
added tax rates (maximum 18%) in 2009, but the government considered changing VAT
accrual rules in favor of the taxpayers. Minister of finance Alexey Kudrin, who resisted tax
breaks until September,
[63]
concurred with Putin's proposal, estimating that they will save
the businesses around 500 billion roubles annually.
[64]

Earlier in November, Kudrin announced that the state has accepted the fact of a long-term
drop in oil prices and that the existing state budget plans will hold unchanged if the oil prices
stabilize on 50 dollars per barrel mark.
[65]
Even with tax breaks effective, Kudrin estimated
that the 2009 state budget will break even or, in worst case, bear no more than 1%
deficit.
[62][64]
The deficit will be covered by Stabilisation Fund, without resorting to
borrowing.
[62]

In December the government lifted import tariffs on industrial equipment imported by
metallurgy, construction, forestry and textile industry,
[66]
at the same time enforcing
increased tariffs on imported cars.
On 15 April 2009, Finance Minister Alexei Kudrin said the federal budget will show a deficit
of 7.4% of GDP in 2009. In comparison, the US expects a budget deficit of 13.5% of GDP,
Britain 9.3%, and France 6.6%. According to Kudrin forecast for the 2010 deficit is 5%.
Kudrin warned, that Russia must cut down its budget deficit before 2011. "Our vulnerability
to the crisis is higher than that of the countries with more diversified economies. This is why
2009 should be a unique year. We must not have a comparable budget deficit in
subsequent years. We must work to reduce it to 3% in 2011," he said.
[67]

On 25 May 2009, President Dmitry Medvedev said the budget deficit in 2009 will be "at
least 7%" of GDP.
[68]

Corporate governance[edit]
Federal Financial Monitoring Service of Russia, the agency in charge of domestic stock
markets and corporate governance, pressed the corporations to reveal their true owners
and signed an agreement with the government of Cyprus (20 November) that may enable
inter-government dislosure of ownership records. Cyprus is, nominally, the number one
investor in Russia; 99% of RTSstock trades are arranged between foreign shareholders.
[69]

International cooperation[edit]
Russia has agreed to co-finance International Monetary Fund emergency loans to other
states, initially contributing one billion US dollar.
[70]
Earlier, in October, Russian ambassador
to Icelandannounces that Iceland will receive a 4 billion loan from Russia to mitigate
the 20082012 Icelandic financial crisis. The loan will be given across three or four years,
and the interest rates will be 30 to 50 points above LIBOR.
[71]
Prime minister Geir
Haarde had been investigating the possibility of a loan provided by Russia since the mid-
summer.
[72][73]
Iceland's Central bank Governor Dav Oddsson later clarified that the loan
was still being negotiated.
[74]

Crisis in real economy[edit]
At the end of November 2008, The Russian economy as a whole was not in a state of
recession. The government forecast for 2009 stood at a 6.7% annual growth rate while a
November 2008World Bank report projected 3% growth for 2009,
[58]
However, a revised
projection issued 30 March 2009 by the World Bank projects a 4.5% decrease for 2009 with
unemployment projected to rise to 12% by the end of 2009. The World Bank report
expressed concern about the condition of the poor and recommended increases in social
support payments such as unemployment payments and child support payments. The
report projected a slight rise in the average price of oil during 2010, up to $53 a barrel from
the projected average of $45 for 2009.
[75]

In the middle of December 2008 Russian officials confirmed that possibility of a recession
was inevitable. "Russia is headed for a recession", the country's deputy economy
minister, Andrei Klepach, has said. Asked whether Russia would have a recession, he said:
"It's started already. I'm afraid it will not be over in the next two quarters. ... A major drop
began in October and there will also be drops in NovemberDecember," he said, according
to official reports. Recessions are normally declared after two quarters of negative growth.
He also said that full-year economic growth for 2008 would be lower than the 6.8%
previously forecast.
[76]

Steel industry[edit]
Russian steel industry is dependent on foreign markets and domestic construction and
automobile industries. Crisis in the industry was first publicly reported in the end of
September early October. Magnitogorsk Iron and Steel Works laid off 3,000 workers (10%
of its Urals staff) and reduced output by 15% on 7 October,
[77][78]
another layoff of 1,300 was
announced in early November.
[79]
Severstal reduced domestic production by 25%; its US
and Italian production dropped by 30%.
[78]
Evraz Group, employer of 40 thousands workers
in Kemerovo Oblast, was reported negotiating layoffs with the unions and regional
government since 30 October. The company, specializing in construction-grade rolled steel,
was inherently in worse position than other Russian steel mills. 13 November Evraz
announced that, instead of layoffs, it will decrease workers' wages by a third. Some of
Evraz facilities were converted to a four-day working week; the company reduced output to
an estimated 5060% of its capacity.
[80]

On 18 November Goskomstat insider reported an unprecedented drop in industrial prices
minus 6.6% monthly, following a 0.8% drop in September (the agency itself delayed its
regular monthly report). Most of the losses concentrate in raw material industries;
automobile and tool-making industries dropped only 0.4%.
[81]
In two months, gasoline and
diesel oil wholesale prices dropped by 12.8% and 16.5%. The worst price fall hit the steel
industry: pig iron and ferric alloys dropped 21.7% in October after a 8.9% drop in
September. Prices on aluminum and nickel are down to break-even point. The decline is
sufficient to indicate a recession.
[82]

In November the industry relied on government funds distributed
through Vneshtorgbank loans. VTB issued a 10 billion roubles emergency loan to Evraz to
finance its current tax payments;
[83]
a similar 5 billion loan was issued to OAO
TMK. Magnitka was reported "in the line" for VTB financing.
[84]
The industry continued to
implode, and on 14 and 18 November Novolipetsk Steel shut down two of its five
[85]
blast
furnaces, reducing its pig iron capacity by 2.5 million metric tons, or 27%.
[86]
On the same
day Novolipetsk Steel denied steel shipments to GAZ due to automobile maker's default on
payments.
[87]

Automotive industry[edit]
Main article: Automotive industry in Russia
In June 2008 The Economist described "Russia's booming car market" as a place where
"you just need someone to count the money".
[88]
In November the market slowed to its
lowest since January 2007. AC Nielsen linked the market drop to a collapse in auto
loan programs and general uncertainty among consumers, and predicted that unless auto
loans recover, the market will slide back into 1990s.
[89]
The government supported domestic
auto makers by an increase in tariffs on imports, leading to an expected 7.58% price
increase for imported cars.
[90]

GAZ and KAMAZ were the first auto makers to declare production cuts in September
October 2008. GAZ truck production has decreased by 23.4% in September 2008; in
October the company announced week-long shutdowns of the main assembly line to meet
decrease in demand for its most successful line, the GAZelle truck.
[91]
KAMAZ, the target of
acquisition by Daimler AG since July,
[92][93]
has been reporting financial difficulties since
September. In October KAMAZ reduced working hours by a third, from six-day to four-day
working week.
[91]
KAMAZ requested a 15 billion rouble state-backed loan and took a private
loan from Citigroup at 9% over prime rate;
[94]
in December Daimler AG acquired the first
10% in KAMAZ stock, citing "perfect storm" as a good time acquisition.
[95]

AvtoVAZ disclosed emergency measures on 16 October, when Igor Sechin held an
industry-wide anti-crisis brainstorming session in Togliatti.
[96]
AvtoVAZ reported a stockpile
of 100 thousands unsold cars (two months' output). The company requested government
assistance of 1 billion US Dollars arranged through a Vneshtorgbank loan. Unlike other
major borrowers who used VTB loans to substitute foreign capital, AvtoVAZ loan was
intended solely to pay current expenses.
[96]

AvtoFramos, Moscow-based manufacturer of Renault Logan, has confirmed that instead of
a planned weekly New Year holiday, the plant will stop for a month, 12 December 2008 to
12 January 2009. Trade unions asserted that AvroFramos has practiced short-time
stoppages in November; plant administration refuted these statements. According to the
unions, unsold stock reached 8 thousand cars, a month's output of the plant.
[97]

Amtel-Vredestein has closed two of its tire plants due to cash flow problems.
[98]
On 2
December media announced closure of Bor Glass Works, the principal supplier of auto
glass,
[99]
but the news was soon refuted as false by the plant administration.
[100]

Construction and real estate[edit]
In the first half of 2008 Russian construction industry, apparently immune of the global
financial squeeze, grew by 22% in nominal money compared to 2007.
[101]
In September
October Mirax Group, Sistema Hals, ST Group and other real estate developers announced
freezing of future projects and intention to dispose of ongoing projects in early stages, citing
an unacceptable increase in interest rates and uncertain demand. According to a Mirax
executive, "our clients are panicking, and that is affecting our business",
[102]
"... bank
financing for developers has practically ceased".
[103]
Developers and builders of a lesser
scale are facing a "struggle to survive",
[102]
especially in regional cities. In October
2008 Orenburg construction executive described regional business prospects as "very bad",
notably the fact that "there is no single bank for today which grants mortgage loans...
Construction industry will not survive under such terms."
[104]

27 October Vladimir Putin urged the government agencies to increase state purchases of
road and housing construction services, arguing that the state must capitalize on the
decrease in prices of raw materials. The state allocated 50 billion roubles to buy ready-to-
occupy urban housing from cash-strapped developers. Putin emphasized that the new
contracts must be struck on new, decreased, price terms estimated to be 2030%
cheaper than in spring.
[105]
Strabag executive estimated that in 2009 construction costs will
decrease a further 30%.
[106]
In November Moscow city government has been successfully
pressing local developers for a 25% discount against October auction prices; the only
developer who attempted to sue the city for a breach of contract withdrew their lawsuit and
accepted the government terms. City government also pulled out of the 118-floor Russia
Tower project,
[107]
which was immediately suspended by its developer, citing "credit
crunch".
[108]

Other industries[edit]
In November, the volume of Russian paper exports to China decreased by 3040%,
coupled with a 30% drop in prices. Exports to Western Europe fare marginally better, with
an estimated 2540% drop in production volumes. Russia's largest producer of industrial
paper bags, Segezh Paper Mill (controlled by the Bank of Moscow and the City of
Moscow
[109]
), declared a ten day shutdown on 24 November.
[110]
UPM-Kymmene
Oyj anticipates at least a 3040% decrease in output compared to 2008.
[110]
In June 2010,
President Dmitry Medvedev visited Silicon Valley in San Jose, California in order to cultivate
ideas of how to develop Russia as a major research center. Skolkovo, a mid-sized city near
Moscow, is the proposed location for this Russian Silicon Valley, and will have its own tax
structure. Yet, Medvedev has been criticized by opposition politicians for deflecting attention
away from the struggling economy and corruption.
Airlines[edit]
In JuneAugust 2008 the fleet of KrasAir, a Krasnoyarsk-based airline with a controlling
state interest, was grounded by the fuel suppliers' refusal to extend credit to the company
that defaulted on payments. Other members of AiRUnion consortium, notably Dalavia, also
folded in August. Thousands of passengers were stranded in airports; flight delays and
cancellations became a national agenda.
[111]
Government action focused on setting the cap
on jet fuel prices and restructuring its assets into a new company managed
by Rostechnologii, a newly formed state conglomerate. Ministry of Transportation
distributed the licenses to fly former KrasAir routes to other companies. KrasAir also
defaulted on payments to its staff, and on 27 October a strike action, coupled with fuel
suppliers' denial of service, finally ruined the airline. Dalavia lost its license earlier in
October.
[112]
The collapse of KrasAir also threatened Sky Express, Russia's first low cost
carrier co-owned by the EBRD and former manager of KrasAir.
[113]
22 October the assets of
bankrupt KrasAir, Domodedovo Airlines, Samara Airlines and Atlant-Soyuz Airlines were
consolidated in a new company, Rosavia, co-financed by the City of Moscow and
Rostekhnologii.
[114]
Rossiya, Orenair, Kavminvodyavia, Vladivostok
Air, Dalavia and Saravia were originally planned to join this proposed airline holding
company, too, which would have made Rosavia the largest Russian airline by fleet size.
Following a 20 percent drop of domestic passenger numbers in Russia per month,
the federal government scrapped all plans concerning the new airline on 5 March 2009
[115]

Agriculture, food industry and retail[edit]
Russia had a high grain harvest in 2008, but so it was elsewhere in the world, bringing the
prices down. To support the trade, Dmitry Medvedev authorized a state export subsidy of 40
US dollars per metric ton. This, according to the minister of agriculture, is sufficient to
maintain exports at 2025 million metric tons.
[116]
The food industry is, however, locked
between high costs of farm produce and tight price and credit terms dictated by retail
chains. Food industry executives anticipate that the chains will eventually lose part of their
clients to street markets, as the suppliers are forced to develop this independent sales
channel.
[117]

Domestic retail chains, heavily leveraged,
[118]
were experiencing liquidity crisis at least since
April 2008.
[119]
The first chain to go bankrupt in May 2008, Grossmart (190 stores in Moscow
region), had a particularly high debt-to-EBITDA ratio of 6 to 1.
[119][120]
Arbat Prestige, subject
to government attacks since 2007, defaulted on its bonds in June.
[120]
In November 2008
nine leading food retail chains (out of nearly 300) received access to government-backed
financing.
[117]
Nevertheless, retailers are pressing food suppliers for longer credit terms or
bigger cash discounts, demanding up to 50% price cut for cash payment. Suppliers, in a
mirror move, raised "regular" credit prices by 2060%. Rather than submit to the chains'
demands, they simply refuse to sell; visible depletion of stocks has affected only a few
affected chains.
[118]

Social impact[edit]
Unemployment[edit]
A proprietary Ernst & Young survey of 113 clients that leaked into Russian press in
November summarized their losses at 8% of managerial and 6% of low-level jobs by end of
October. All companies in the survey practiced some sort of reducing labor costs. One
company in four practiced unpaid "vacations"; 8% of clients settled for reduced working
hours.
[121]
Federal Migratory Service announced in November that 1123 Russian companies
reported upcoming layoffs of 45 thousand.
[79]

Most layoffs were reported in metallurgy and financial services: 20% in Uralsib, 1000
in Vneshtorgbank's VTB24 retail division.
[79]
1 December Vedomosti reported upcoming
40% cuts in MDM Bank and 80% in IFD Kapital.
[122]
Sberbank endorsed a long-term
program to reduce headcount by 25% in 2014.
[79]
In telecommunications, Sitronics laid off
up to 10% in all business units; in audit services, Deloitte Touche Tohmatsu reduced
number of partners in its Russian division by 17 out of 180.
[121]
Vedomosti has set up a
private "layoff newsreel" syndicating independent reports of job cuts, yet as at 7 December
2008, there are no reliable nation-wide statistics on white-collar unemployment, which
usually escapes official unemployment record.
[123]

By late November, Kremlin First Deputy Chief of Staff, Vladislav Surkov, was warning that
the middle classes should be defended from poverty during the crisis. He called for swift
measures to protect the middle class from layoffs and to support consumption.
[124]
"If the
1980s were the times of the intellectuals and the 1990s were the times of the oligarchs then
the 00s can be seen as the epoch of the middle classes,' Surkov said in a speech published
on the Web site of the ruling United Russia party ... The main task of the state during the
slump must become the preservation of the middle class, the defence of the middle class
from the waves of poverty and confusion that are coming from the West," he said.
[124]

According to official statements released 9 December, rate of unemployment growth
peaked in the middle of November and slowed down in subsequent weeks. In the week
ending 3 December overall unemployment grew by 1.6% to 1.315 million people, following a
2.3% increase in the preceding week. The state also reported an increase in unpaid
vacations and reduced working week employees to 149.3 thousands. The number
increased by 84% in a single week ending 3 December. The trade unions anticipate that
official unemployment will peak at around 2 million people in 2009, when hidden forms of
unemployment become visible to statisticians.
[125]
Yet on 12 December Putin announced
completely different unemployment numbers 4.6 million in October.
[126]

In February 2009 the unemployment rate peaked at a seven-year high of 9.4%, then began
to steadily decline, falling to 7.7% as of October.
[127]

Consumer price inflation[edit]
Official consumer price inflation in JanuaryAugust 2008 reached 14.8%.
[118]
By the end of
November, food price inflation for an 11-month period reached 15.3%. Overall price
inflation, taking into account consumer and industrial prices, reached 12.5% compared to
10.6% for the same period of 2007. Decline in short-term inflation was credited to a
reduction in monetary supply.
[128]
Inflation slowed through 2009 with a year on year rate of
9.1% as of November, down from 13.8% a year earlier.
[129]



The Russian policymakers had enough financial resources ($600 billion with the Central
Bank of Russia) to manage the cost of a bailout package of $200 billion at 13 percent of
GDP. It was used to support the declining ruble toward the end of 2008 and early 2009, to
provide some funding to the oligarchs so that they could repay their hard currency loans,
and above all to provide cash to the banks. With improving oil prices, the situation has
improved for the budget, and the CBR reserves have moved up to $400 billion from a low
$300 billion last December. But unemployment has been edging up and inflation still
remains high at annual 7 percent. It limits the ability of the policymakers to mount another
stimulus for helping the unemployed. The main problem however consists in diversifying the
economy away from commodities (among them oil and natural gas) and dealing with
massive corruption in the system. Russian President Medvedev described Russia as a
"corrupt, raw-material based economy." That will be the challenge facing the policy makers
in the years ahead.
The financial turmoil originating from the U.S. subprime mortgage crisis hit Russia
by early September 2008, prompting the Russian government and the Central Bank
of Russia to undertake a set of speedy and concerted measures to soften the impact
of the crisis. These initial measures supported the value of the ruble as ruble holders,
domestic and foreign, switched to dollars. They also provided hard currency to major
Russian banks and Russian big business (the so-called oligarchs) which had
borrowed heavily from foreign banks for their expanding operations from 2000 to
2007.1
As the crisis unfolded, the Russian central banks policy choices for unlocking the
credit crunch and reviving the declining economy were constrained by a double-digit
inflation rate in 2008. At the same time, the Ministry of Finance faced a high budget
deficit as tax revenues from oil export earnings steeply declined from the end of
2008. In short, the Russian economy faced a negative growth rate and a significant
budget deficit in 2009, a sharp reversal from their sustained positive record from
2000 to 2007.
Symptoms of the Crisis
The initial severity of the crisis was underlined by a series of indicators. By mid-
October 2008, the Russian stock market (Fig. 1) had plummeted by 70 percent from
its May peak. Its fall was accelerated by nervous foreigners discarding their ruble-
denominated assets following the Russian-Georgian war of early August.2 The
Russian ruble had also declined by 14 percent against a combined dollar/euro basket
since mid-July (Fig. 2). The foreign exchange reserves of the Russian central bank
had dropped to $484 billion from approximately $600 billion (Fig. 2) although they
still remained the third largest in the world after those of the central banks of China
and Japan.3
Figure 1: Russias Benchmark RTS Stock Index,
October 2005-December 2009 (Daily Figures)

Source: Bloomberg, Russias Benchmark RTS Stock Index, October 2005-December
2009, Bloomberg Chart Builder.
The plunging stocks severely threatened the financial fortunes of Russian oligarchs
who had borrowed heavily from western banks to expanding their businesses,
offering their company stock as collateral.4 The plummeting stock market, however,
had not affected ordinary Russians because they did not hold stocks as American
households do (although labor layoffs by the troubled companies had begun to have
an effect). But the declining ruble had the Russian populace worried. Toward the end
of the year, currency exchange booths in Moscow began facing demands from
Russians wanting to convert their rubles into dollars and euros. Marketing surveys
of the period also report that the Russian middle class, including those who could
afford to buy household appliances and mobile phones, had shrunk for the first time
in a decade, from 25 percent to 18 percent of the population.5 According to a report
by Russias Interior Ministry, 5.5 million Russians had demonstrated in 30,000
protests during 2009.6
Initial Remedial Measures
By the middle of October 2008, the Russian central bank and government sources
had earmarked up to $200 billion to stabilize the situation and contain the outflow
of dollars from the economy. The stabilization measures included outright purchases
of plunging stocks (in the amount of $20 billion), capitalization of selected banks,
and financial support (of up to $50 billion) to companies owned by Russian
oligarchs who had scrambled to raise cash in order to meet margin calls.7 A
significant amount of cash had been assigned (about $36 billion) to the two largest
state-owned banks, Sberbank (the savings bank) and Vneshekonombank (the foreign
economic bank).8 The total proposed bailout, estimated at 13 percent of GDP, was
the largest bail out among the G-8 member countries.9 It was substantially higher in
terms of national GDP than the U.S. stimulus package (amounting to $787 billion)
adopted by Congress, which was 5.5 percent of U.S. GDP.
Figure 2: Russian International Reserves and the Ruble Against a $/ Basket, July
2008-December 2009 (Daily Figures)

Source: Bloomberg Chart Builder.
The Central Bank of Russia continued offering dollars in exchange for the continuing
flood of rubles in the foreign exchange market (as rubles earned from the sale of
ruble-denominated assets were converted into dollars which were then whisked out
of Russia). It had substantial foreign exchange reserves but this process could not
continue indefinitely. Toward the end of 2008, it was losing dollars at the rate of $12
to $14 billion a week. Despite the hemorrhaging, the bank had refrained from
imposing explicit exchange control measures to stem the outflow of dollars. Some
foreign banks located in Moscow had reported that they were contacted by officials
from the Russian central bank with suggestions that they should voluntarily
discourage dollar outflows from their coffers.
The initial Russian bailout was a top down, speedy process involving a few decision
makers without being subjected to independent scrutiny or legislative oversight or
systematic winnowing of the turmoil victims. One looked in vain for the likes of
Congressman Barney Frank insisting on a vigilante role for lawmakers.
Vneshekonombank, fully state-owned, handed out cash in the amount of $11 billion
(out of the earmarked $50 billion) to the oligarchs who were threatened with the loss
of their assets (in the nickel, aluminum and steel companies and a
telecommunication conglomerate) to European banks.10 The choice of who would
be rescued and in what amounts was influenced by the judgment of Prime Minister
Vladimir Putin and his close advisors. More to the point, European banks were not
allowed to capture stocks of strategic Russian companies. By a strange irony of
circumstances, the Russian state (via the state-owned Vneshekonombank) was
regaining stocks which it had given away to the oligarchs who had provided cash
support to the Russian budget in 1996 and 1997. This move to larger state ownership
reflects a danger facing the Russian economy, despite Prime Minister Putins
reassuring comment on 29 October 2008 that, the expansion of the governments
presence in the economy is a forced measure, and is of a temporary nature.11
On October 23, President Dmitry Medvedev posted this encouraging entry for
Russian citizens on his video blog on the Kremlin website: I will tell you honestly,
Russia has not yet been caught in this whirlpool and has the opportunity to escape
it.12 Despite the concerted measures and presidential cheerleading, Russias policy
makers faced two immediate issues.
Immediate Policy Concerns in Early 2009
The slide of the ruble, continuing almost through the first quarter of 2009 from 34
rubles for a combined dollar/euro basket to 41 rubles by mid-March (Fig. 2),
remained the chief preoccupation of the Russian central bank. Similar to the
preoccupation of Washington policy makers, Russian authorities wanted Russian
banks to start lending to alleviate the credit crunch. The declining ruble (in contrast
to the reviving dollar which was a safe haven in late 2008 for risk-averse clients),
however, had serious implications for Russias finance minister and central bank
chairman. A weakening ruble implied that it was worth less for Russian buyers of
imported goods as well as of homemade items (in the absence of domestic
productivity gains). Russian inflation, which had been steadily brought down to an
annual 10 percent in 2006 (Fig. 3), was running at 13.7 percent in the first quarter of
2009, and the declining ruble aggravated the policymakers inflation control
maneuverability. Unlike the U.S. Federal Reserve, the Russian central bank could
not lower the rediscount rate in order to facilitate commercial bank borrowing so
that the credit crunch in the economy could be overcome via bank lending to
businesses. Instead, it continued fighting the high annual inflation rate of 13 percent
in March 2009 via an exorbitant rediscount rate of 13 percent.
Figure 3: Annual Percentage Change in Consumer Price Index, 1998-2009

Source: Economist Intelligence Unit.
The second issue was related to declining oil prices in world markets which had
tumbled from $147 a barrel in July 2008 to $30 per barrel by December 2008. At a
price of $50 per barrel in late March 2009, the projected deficit of the government
would be as high as 8 percent of GDP. On the other hand, at an oil price of $70, the
2009 budget of the government would break even. Unless oil prices rose above that
level, the budget surpluses of the immediate past (Fig. 4), which provided resources
for defense spending and infrastructure upgrades, would vanish. The Russian energy
sector, which included oil and natural gas together, generated a significant portion of
central government revenues. Previously, the high oil prices in world markets
(combined with revived Russian oil production) supported an export-led annual
growth rate of the Russian economy averaging 7 percent starting in 2000 (Fig. 5).
That growth performance, which kept the unemployment rate (Fig. 6) at 6 to 6.7
percent of the economically active population in 2008, was in danger as 2009
unfolded. Not surprisingly, the Ministry of Finance was geared up for the challenge
of supporting unemployed workers from a separate, off-budget Welfare Fund of $49
billion set up using the budget surpluses from the years 2000 to 2007.
Figure 4: Annual Central Government Receipts Minus Central Government Outlays
as a Percentage of GDP, 1998-2009

Source: Economist Intelligence Unit.
2009 Policy Issues
Throughout 2009, the Central Bank of Russia continued lowering the rediscount
rate from a high of 13 percent in order to facilitate bank borrowing while warily
watching the high inflation rate, which to its relief was declining as the economy
moved into a recession with lower spending by businesses and households. At the
same time, the Putin government managed to finance the stimulus, which was
directed at supporting the unemployed from a separate off-budget fund accumulated
during years of oil-revenue-financed budget surpluses. To its dismay, the projected
budget deficit of 8 percent of GDP in 2009 required an overall cutback of
expenditures and strenuous juggling of budget appropriations among several
categories of defense, infrastructure buildup, and social services maintenance.
Figure 5: Annual Percentage Change in Real GDP, 1998-2009

Source: Economist Intelligence Unit.
Figure 6: Annual Recorded Official Unemployment as a Percentage of Total Labour
Force, 1998-2009
Source: Economist Intelligence Unit.
But not all was lost as far as budgetary policy was concerned. As the global economy
revived, oil prices began moving up from a low of $30 per barrel in December 2008
to around $75 per barrel a year later. This increased Russias oil export earnings, its
central bank foreign exchange reserves moved up, the ruble stabilized, and foreign
capital started returning to Russia. On the eve of the G-20 London Summit of 2 April
2009, the Russian ruble traded at 41 rubles against the dollar/euro basket, and the
official reserves of the Russian central bank were close to $385 billion. In late
November, the exchange rate had appreciated to 29 rubles measured against the
combined basket, and the central banks foreign exchange reserves had risen to $444
billion. Even the stock market had gained 176 percent from its low rating in January
2009.
On the macroeconomic front, the projected GDP decline of 8 percent for 2009 could
turn out to be lower, although the estimates varied. Rosstat, Russias official
statistics gathering agency, announced on 18 February 2010 that retail sales had
increased by 0.3 percent (year-on-year) in January for the first time in a
year.13 More substantively, the projected budget deficit of 8 percent of GDP for
2009 promised to be smaller in the end as oil prices revived, oil export earnings
picked up, and tax revenues trickled in. Indeed, the federal budget signaled
improved performance and posted a surplus of 2.4 percent of GDP for the month of
January 2010.14 The most worrisome macroeconomic indicator proved to be the
unemployment rate, which had climbed to 9.2 percent of the economically active
population of 74.8 million, up from 8.2 percent in December 2009. It was expected
to rise to 10 percent by the end of 2010, similar to that of the U.S.
economy.15 Problems in Russias banking sector hobbled the economys growth and
employment prospects as it moved into 2010.
Russian Banks in Continuing Trouble in 2009 and Early 2010
The Central Bank of Russia was unable to promote liquidity in the economy by
encouraging banks to borrow from it at a low rediscount rate. As I have noted, the
central bank could not lower the rediscount rate significantly because the annual
inflation rate (in terms of the Consumer Price Index) was still a high 9.1 percent in
November 2009. By contrast, Ben Bernanke, the chairman of the U.S. Federal
Reserve, repeatedly declared in meetings of the Federal Open Market Committee in
2009 that the short-term interest rate at which U.S. banks could borrow from the
Fed would remain at close to zero for an extended period of time, because inflation
was not an imminent danger for the U.S. economy.16 At the same time, the
nonviable condition of Russian banks continued to pose a major hurdle with regard
to the prospects for the Russian economys revival. During the economys expansion
from 2000 to 2007, some banks had expanded their loan activity on the basis of
foreign deposits which foreign claimants had begun withdrawing. The Association of
Russian Banks (ARB) reported on 18 February 2010 that overdue commercial bank
loans, relative to total loans, would rise from about 12-13 percent at the end of 2009
to as much as 20 percent in the first half.17 On the other hand, Russian central bank
chairman Sergei Ignatiev suggested that bank lending would rise by 20 percent in
2010 because Russian banks had excess liquidity.18But precise details relating to the
balance sheets of Russian banks are difficult to track down. By contrast, the U.S.
Federal Reserve carried out a stress test in May 2009 for assessing the financial
health of the too big to fail (TBTF) U.S. banks, and the U.S. Treasury provided
them with taxpayer dollars to bolster their capital requirement.
Russian banks have received bailout funding from the government, too, but they
remain closed to Russian lawmakers watchdog surveying and public scrutiny. A
major complicating feature with regard to the speedy and decisive cleanup of these
banks arises from their ownership by Russian oligarchs.19 Despite this dilemma, the
reorganization of banks with a view to restoring their essential function as business
lenders constitutes the most urgent policy task confronting Russian authorities
today. According to Standard and Poors, nearly fifty banks are likely to be merged in
the coming months. The performance of the banking sector, however, calls for
tougher oversight by the Russian central bank and improved banking
practices.20 Beyond 2010, the leadership also faces the formidable challenge of
diversifying the Russian economy away from an excessive reliance on volatile
exports of energy and commodities.
Long-Run Policy Challenges
With a reviving global economy, the demand for oil and natural gas in particular is
forecast to bounce back. In the assessment of the International Energy Agency, the
demand for energy will remain high for the foreseeable future.21 The current
expansion plans in the Russian energy sector are predicated on the near-term
potential of the energy market. But beyond excessive dependence on energy exports,
the Russian economys diversification dilemmas arise from the interlocking of
massive industrial companies in the commodities sector with large service,
technology, and trading enterprises. For example, Gazprom, the worlds largest
natural gas monopoly, not only supplies gas to customers inside and outside the
country but also effectively controls the entire natural gas transport network. Both,
in turn, with majority ownership by the Russian state, are effectively controlled in
their production and pricing decisions by state-appointed executives. The
interlocked structure not only prevents the emergence of robust corporate
governance and marketbased competitive decision making but also fosters an
attitude of legal nihilism.22 In a striking display of forthrightness, President
Medvedev remarked on 10 September 2009: Can a primitive economy based on raw
materials and economic corruption lead us into the future?23
Clearly, the adoption of market-based budgetary, monetary, and exchange rate
policies by technocrats in the Ministry of Finance and the Central Bank of Russia has
helped them steer the economy through the financial crisis. But these policy
instruments may not be enough to alter the nature of Russias entrenched, state-
controlled big business. The flow of foreign investment into Russias big businesses,
even in a minor role, can help initiate the process but it is a risky venture. Russias
entry in the World Trade Organization (WTO) can also promote rule-based
procedures in pricing and trading activities, but foreign investors and WTO rules can
only play a marginal role. Ultimately, the Russian economys overhaul from the top
down will depend on destructive creation initiatives from the leadership in
Moscow, to replace an opaque state-controlled economy with a open, transparent,
and market-driven system.
NOTES
1 William Mauldin, Russia Providing $200 Billion for Banks, Builders, Bloomberg,
7 October 2008.
2 Jason Bush, Georgia War Hits Russian Investment, Business Week, 27 August
2008.
3 The Central Bank of the Russian Federation, International Reserves of the
Russian Federation in 2008, 5 December 2008; Ministry of Finance Japan,
International Reserves/Foreign Currency Liquidity (as of December 31, 2008), 9
January 2009, http://www.mof.go.jp/english/e1c006.htm; State Administration of
Foreign Exchange China, Monthly Foreign Exchange Reserves,
2009, http://www.safe.gov.cn/model_safe_en/tjsj_en/tjsj_detail_en.jsp?ID=3030
3....
4 Yuriy Humber and Torrey Clark, Oligarchs Seek $78 Billion as Credit Woes Help
Putin, Bloomberg, 22 December 2008.
5 Mikhail Delyagin, Novaya gazeta, 22 September 2008, 2.
6 Itar-TASS, 17 February 2010, cited in U.S.-Russia Business Council Daily Update,
23 February 2010, 1.
7 Lyubov Pronina and Maria Levitov, Russia Pledges $20 Billion for Stocks, Cuts
Oil Tax, Bloomberg, 18 September 2008; and Andrew E. Kramer, A $50 Billion
Bailout in Russia Favors the Rich and Connected, New York Times, 30 October
2008.
8 Andrew E. Kramer, Russia Approves $36 Billion Loan Plan, New York Times, 10
October 2008.
9 International Monetary Fund, Russian Federation: 2009 Article IV Consultation,
August 2009, IMF Country Report No. 09/246, 14-26.
10 Igor Naumov, The Country Has No Need for Metal, Nezavisimaya Gazeta, 13
March 2009.
11 Putin: the Role of the State in the Economy is Temporary, Vesti, 29 October
2008, http://www.vesti.ru/doc.html?id=219561.
12 Dmitry Medvedev, The Latest Video Message in Dmitry Medvedevs Blog Deals
with the Global Financial Crisis, President of Russia: Official Web Portal, 23
October
2008,http://eng.kremlin.ru/text/speeches/2008/10/23/2126_type207221_208290
.shtml, accessed 7 February 2010; for video in Russian
see http://blog.kremlin.ru/post/2.
13 Bloomberg, 18 February 2010, cited in U.S.-Russia Business Council Daily
Update, 18 February 2010, 1.
14 Nezavisimaya gazeta, 9 February 9 2010, cited in U.S.-Russia Business Council
Daily Update, 9 February 2010, 1.
15 Vedomosti, 18 February 2010 cited in U.S.-Russia Business Council Daily Update,
18 February 2010, 1.
16 Statements can be accessed at Board of Governors of the Federal Reserve System,
Meeting calendars, statements, and minutes (2004-
2010),http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm,
accessed 7 February 2010.
17 Bloomberg, 15 February 2010, cited in U.S.-Russia Business Council Daily
Update, 17 February 2010, 1.
18 Alfa Bank, Morning Brief, 5 February 2010, cited in U.S.-Russia Business Council
Daily Update 5 February 2010, 1.
19 A 2005 study by Standard & Poors shows that 77 percent of aggregate ownership
capital of the top thirty banks represented by controlling or blocking stakes. See
Julia Kochetygova et al., Transparency and Disclosure by Russian Banks:
Disclosure Practices of Russian Banks Currently Dismal, Standard & Poors, 26
October 2005.
20 Forbes, 9 December 2009 cited in U.S.-Russia Business Council Daily Update, 9
December 2009, 1.
21 International Energy Agency, Energy to 2050. Scenarios for a Sustainable
Future, 2003, 63; International Energy Agency, Oil Market Report, 15 January
2010, 4.
22 On becoming president on May 7, 2008, Medvedev remarked: We have to
achieve a true respect for law and overcome legal nihilism. Details can be found
athttp://www.rian.ru/politics/20080507/106773965.html.
23 See President Medvedevs remarks
at: http://eng.kremlin.ru/speeches/2009/09/10/153_-type104017
_221527.shtml.
http://jia.sipa.columbia.edu/russia%E2%80%99s-financial-crisis-economic-setbacks-and-policy-
responses
MOSCOW The financial turmoil in Russia might not be all-embracing yet, but
some of its features suggest its gloomy prospects. Big business lack of
confidence in national economy is what primarily strikes the eye.
Speaking at a Cabinet meeting last week, Prime Minister Vladimir Putin unveiled
scandalous information concerning the bank giants government bailout money
recipients stepping up their operations to move funds offshore in lieu of
channeling the money to its intended recipients in industry that badly need it.
There are some other reasons for capital outflow, though. Bank of Russia is
forced to expend billions of dollars to prop up the ruble that is sinking
dramatically over the economic confusion and plummeting oil prices. Russias
stabilization fund lost $100 million over the past month a cause for serious
concern to the Russian leadership.
If recently the accumulated hard currency reserves have seemed enormous and
reliable, today, at the current spending pace, they may well be exhausted as
early as next year. Panic buying of cash dollars among the population does
nothing to help consolidate the ruble. Depositors are withdrawing their savings
even from such reliable government-run banks as the nation-largest Sberbank.
Last month saw its deposits plunge by $3 billion (2.5%).
Despite the countrys financial leaders numerous vows that there will be no ruble
devaluation, is it a fait accompli. Over the past two and a half months ruble lost
over 15% of its value. This is none other than devaluation.
What are the governments plans to reverse these negative trends? In fact, it
looks like it goes out of its way to employ government regulation measures,
including the use of power structures, rather than market levers. For example,
the Cabinet meeting where Putin accused the banks giants of funneling money
into foreign accounts was attended by Prosecutor General Yuri Chaika and
Interior Minister Rashid Nurgaliyev. Captains of industry must have unequivocally
interpreted such a meeting make-up as a signal that some day these very people
might well call them to account.
In line with the tough government regulation policy, President Dmitry Medvedev
called for the Central Bank to appoint commissars to oversee the use of the
government funds allocated to combat the crisis. The Federal Financial Markets
Service Russias securities watchdog called for all market participants to
disclose their ultimate owners, largely offshore residents.
Rather than work to establish a business-conducive environment, the
government is pouring oil on the flames. Last week saw Deputy Prime Minister
Igor Sechin give the directions to resume investigation into the 2006 accident at a
mine developed by a major fertilizer producer Uralkaliy. As a result, Uralkaliy
could well be fined several billion dollars.
Sechins resolution sent Uralkaliys shares into a 75% freefall. It looks like the
government is seeking to gain control of this lucrative business through
bankrupting it and crowing out the present owners. Under the circumstances this
would inevitably raise concerns with other Russian businesses. They will most
likely wind up their operations and take the resources out of the country. The
financial crisis in the country is going to exacerbate.
http://blog.heritage.org/2008/11/17/understanding-russias-financial-crisis/