Russia's Ticking Time Bomb
Back on January 21st we wrote, "The latest potential catastrophe is now building in Russia. And, it appears to be gaining momentum. Let me stick my foot in my mouth and say I would put the potential for a blow up in Russia near the top of a "next" shoe to drop list. If this comes to pass, isn't it ironic that Time magazine just named Putin "Person of the Year"? What does that make Time magazine?".
That very week Russian authorities made disdainful comments about the mounting economic problems in the U.S. And that it was inevitable. And, that the Russian banking system was strong and far removed from any such concerns. Well, how quickly times change. Over the weekend the Russian Central Bank's Deputy Chairman admitted for the first time that the Russian banking system is melting down.
"Central Bank Shifts Crises
Russian Central Bank deputy chairman Alexey Ulyukaev, speaking at an annual meeting with bankers in a Moscow suburb yesterday, acknowledged for the first time that there is a substantial crisis of liquidity in the Russian banking system. He stated that the Central Bank will shift its priorities away from inflation control to concentrate more on stability in the Russian banking system. This is in response to the continuing problems stemming from the U.S. mortgage crisis. The Central Bank is this acting in harmony with Western regulators – European central banks and the U.S. Federal Reserve Board – even though it runs counter to government anti-inflation plans. This is indicative that the Central Bank expects the situation to worsen, observers say.
Ulyukaev's radical statement is taken as an attempt to reassure bankers of the regulator's support, especially for small banks, thus making the situation more predictable on the market. Otherwise, the banks may have started to raise interest rates in order to create a reserve of liquidity. Experts say that the refinancing measures instituted by the Central Bank last autumn were insufficient. Moreover, the Central Bank will be unable to raise liquidity through currency purchases as Russia's trade balance turns negative.
Bankers also note that, since Ulyukaev's statements were made in a closed meeting, and the Central Bank's monetary and credit policy for 2008 was written before the beginning of the liquidity crisis, without mention of changes in priority, it is unclear what specific moves the Bank will make, if any."
Now, why would any non-Russian firm extend credit to Russia given this unfolding situation? It was just a decade ago Russia defaulted on its financial obligations. Financial institutions in Europe and the U.S. are close to insolvency in many situations. With very significant inflation in the Russian economy, it is imperative Russian bankers continue to extend credit or risk a significant economic meltdown and deflation. Guess where those Russian foreign exchange reserves are going before this is all said and done? Now what are Russians going to be voraciously attempting to acquire? Maybe dollars? As we've said time and again, most simply do not understand the gravity of what has developed over the last business cycle. I just cringe when I hear statements like what are you buying today in anticipation of a Fed rate cut. The financial world has become a casino. Those telling us to buy the dips or that stocks are cheap have no concept of risk. Let alone rudimentary skills on how to manage it.
That very week Russian authorities made disdainful comments about the mounting economic problems in the U.S. And that it was inevitable. And, that the Russian banking system was strong and far removed from any such concerns. Well, how quickly times change. Over the weekend the Russian Central Bank's Deputy Chairman admitted for the first time that the Russian banking system is melting down.
"Central Bank Shifts Crises
Russian Central Bank deputy chairman Alexey Ulyukaev, speaking at an annual meeting with bankers in a Moscow suburb yesterday, acknowledged for the first time that there is a substantial crisis of liquidity in the Russian banking system. He stated that the Central Bank will shift its priorities away from inflation control to concentrate more on stability in the Russian banking system. This is in response to the continuing problems stemming from the U.S. mortgage crisis. The Central Bank is this acting in harmony with Western regulators – European central banks and the U.S. Federal Reserve Board – even though it runs counter to government anti-inflation plans. This is indicative that the Central Bank expects the situation to worsen, observers say.
Ulyukaev's radical statement is taken as an attempt to reassure bankers of the regulator's support, especially for small banks, thus making the situation more predictable on the market. Otherwise, the banks may have started to raise interest rates in order to create a reserve of liquidity. Experts say that the refinancing measures instituted by the Central Bank last autumn were insufficient. Moreover, the Central Bank will be unable to raise liquidity through currency purchases as Russia's trade balance turns negative.
Bankers also note that, since Ulyukaev's statements were made in a closed meeting, and the Central Bank's monetary and credit policy for 2008 was written before the beginning of the liquidity crisis, without mention of changes in priority, it is unclear what specific moves the Bank will make, if any."
Now, why would any non-Russian firm extend credit to Russia given this unfolding situation? It was just a decade ago Russia defaulted on its financial obligations. Financial institutions in Europe and the U.S. are close to insolvency in many situations. With very significant inflation in the Russian economy, it is imperative Russian bankers continue to extend credit or risk a significant economic meltdown and deflation. Guess where those Russian foreign exchange reserves are going before this is all said and done? Now what are Russians going to be voraciously attempting to acquire? Maybe dollars? As we've said time and again, most simply do not understand the gravity of what has developed over the last business cycle. I just cringe when I hear statements like what are you buying today in anticipation of a Fed rate cut. The financial world has become a casino. Those telling us to buy the dips or that stocks are cheap have no concept of risk. Let alone rudimentary skills on how to manage it.
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