Britannia Radio

TELEGRAPH   17.11.08
Russia's banal reality lies in between energy superpower and bankrupt 
state
Russia has been losing $10bn in foreign reserves a week since it 
snatched South Ossetia and ramped up the new Cold War with nuclear 
threats.

By Ambrose Evans-Pritchard

A fifth of the Kremlin's fire-fighting fund has gone before the 
economic crisis even starts. Would the Medvedev-Putin duo have 
provoked the West so nonchalantly had they known that global 
recession would soon cut the price of Urals crude oil to $49.35 a 
barrel, knocking away the chief prop of Kremlin finance and Russian 
power?

The pace of capital flight quickened last week to $16bn after a 
botched mini-devaluation by the central bank. Tinkering with currency 
bands is hazardous in a country where memories of the 1998 savings 
wipeout are still fresh.

The Kremlin already faces a run on Russia's banks as depositors rush 
to switch their roubles into dollars, despite the $200bn financial 
rescue package. Russia's Globex bank suspended withdrawals by 
depositors on Wednesday. Kommersant newspaper reports that the 
deposit loss from rouble accounts reached 54pc at Sobinbank in 
October, 27pc at Globex, 25pc at Raiffeisenbank, 24pc at Unicredit, 
and 22pc at Alfa.

"The deposit run has intensified to dramatic levels. The government's 
attempts to slow panic migration to foreign currencies has failed," 
said Marina Vlasenko, from Commerzbank.

The central bank is caught in a fixed exchange rate trap. Pegs create 
the illusion of currency stability just long enough to lull everybody 
into a false sense of security (note Greece and Spain inside EMU). 
Russia either burns reserves propping up the rouble, or it risks a 
self-feeding devaluation spiral.

There is a third way, of course. Premier Vladimir Putin issued a 
veiled threat on Monday to impose capital controls. Money flows out 
of the country would be strictly monitored, and "corporate egotism, 
any kind of corruption or abuse" would not be tolerated. Yes, he also 
said that "legal movement of capital overseas is a civilized 
financial transaction. There is no question of any state bans". Take 
your pick.

The cost of insuring against Kremlin default tells us that somebody 
is worried. Credit default swaps (CDS) on Russia's debt traded at 827 
last week, higher than Hungary's debt (605) before it secured an IMF 
rescue. Gazprom debt was off the charts at 1155.

CDS contracts can overstate a case. But investors have rediscovered 
that the Russia story - stripped of BRIC's happy talk - is still not 
much more than a leveraged play on oil and gas. Commodities made up 
85pc of export revenues at bubble peak in May, just before the RTS 
index on Moscow's bourse began its 73pc crash. A trillion dollars of 
paper wealth has vanished.

The government' spending plan for 2009-2011 is based on a Urals oil 
price of $95. Finance minister Alexei Kudrin said the state would dip 
into its Reserve Fund (now 8.2pc of GDP) to cover any shortfall.

This is not a strategy that can survive the global slump we face next 
year. The Kremlin lives off energy taxes. It has no other income to 
speak of. The domestic bond market is tiny.

That is why it had to order oil companies last week to renew export 
shipments. They were selling at near $10 a barrel in the domestic 
market because crude prices have fallen to a level that no longer 
makes it rational to sell abroad given the state's $40 export tariff.

Russia must soon choose: either bleed its oil industry to death, or 
slash spending and face street riots. It is already mobilizing the 
apparatus of coercion. The Moscow Times bravely ran the headline 
"Police get orders to crush crisis unrest".

Interior minister Rashid Nurgaliyev said: "Anti-crisis groups are to 
be set up in the regions to intercept any early indications of 
destabilization."

Marie Mendras, a Russia advisor to French president Nicolas Sarkozy, 
said the Kremlin is responding the only way it knows how. "The Putin 
regime is politically closed, won't listen, and is incapable of 
adapting to this sort of financial crisis, so they are resorting to 
repression," she told a Russia Foundation meeting.

Will Russia go bankrupt again? Unlikely, said Charles Robertson, a 
strategist at ING. Foreign debt - at both state and private companies 
- was 10 times reserves before the 1998 default: it is roughly equal 
this time.
While oligarchs and state firms have built up $500bn of dollar and 
euro liabilities, the volume of short-term loans that must be rolled 
over within 12 months is modest compared to the Asian and Latin 
American crises of recent years. The money supply in the banking 
system is a super-low 1.2 times foreign reserves.
"Today Russia is one of the safest countries in the world. We are 
aware of no case in history of a significant collapse in the currency 
with ratios this low," he said.

The price of oil will not stay low enough for long enough to destroy 
the system as it destroyed the Soviet Union in the 1980s. The 
International Energy Agency warned last week that the world's oil 
fields were depleting at an alarming rate. We will require four new 
Saudi Arabias by 2030 to meet demand.

The inevitable energy rebound will bail out Russia again, but not 
enough to restore the country to superpower status soon, if ever. 
"Does Russia really have energy power?" asked Professor Alan Riley, 
from City University.
"The giant gas fields are running down. Russia must turn to the High 
North where reserves are 560 kilometers into the Arctic, 360 meters 
down, and very expensive to extract. This is at an incompetent Russia 
with a Soviet-style gas system that has not made the investments 
needed," he said.

Somewhere between yesterday's inflated talk of Russian riches and 
today's talk of Russian bankruptcy lies the banal reality of a mid-
ranking nation, run by a dysfunctional elite, with the worst aging 
crisis in the Western world, that happens to be sitting on a lot of 
resources.

As the adage goes: Russia is never as strong as she looks: Russia is 
never as weak as she looks.

=-=-=-=-=-=-=-=-=-=-=-= ALSO ---->
EXTRACTS FROM Putin's Russia has to sober up
A crumbling economy provides the sternest test yet for the autocratic 
leader - but his citizens aren't supposed to know"

Subjected to more than a century of propaganda masquerading as news, 
Russians often seem to live in a different reality from the rest of 
us. And sure enough, at a time when their country is locked in the 
worst financial crisis in a decade, they are more optimistic about 
the economy they are more optimistic than they've ever been.  
According to opinion polls  [mmm? How do they do accurate opinion 
polls in Russia ??  -cs] , 57 percent reckon it is flourishing, up 
from 53% in July.

- - - - , The Kremlin has not lost its touch when it comes to 
manipulating fact.  Obeying orders from the top, Russian television 
has banned words such as "crisis", "decline" and "devaluation".  
Coverage of the mayhem in the country's stock market, where shares 
have fallen by 75% since August,  is scant.

Instead, just as in Soviet times, Russians are told just how bad 
everything is in the west.  The US - Russians are told - is in 
irreversible decline, while desperate Britons are throwing themselves 
into the Thames. The Queen, facing imminent penury, has been forced 
to pawn her diamonds, and, according to one tabloid front page,  we 
can no longer afford to bury our dead.     It has fallen to Russia - 
- - - - - - to come to the rescue of Europe -------[and] to become 
the continent's'  'lender of last resort'.  Are Russians are 
frequently reminded this - - - is almost entirely die to the wisdom 
and leadership of Vladimir Putin - - - [but] there is growing 
evidence of panic behind the scenes.

[Then follow paragraphs showing why and how Putin has amended the 
constitution to enable him to take up the Presidency again]  In fact 
part [this] this is to do with the financial crisis which is far 
worse in Russia than Mr Putin  would care publicly to admit.  - ,- - 
So far the crisis has mainly affected Russia's super-rich. In May the 
value of the stock owned bt Russia's wealthiest oligarchs stood at 
$399 bn,  Today it is worth $70 billion...  Russia's biggest business 
owe western banks  more than $500bn, using stocks as collateral 
[!!] . The fall in share prices has prompted many banks to call in 
their loans  The state has promised $50bn - - - but not all will be 
saved.

- - - - - - - - -

Last week the price of russia's oil fell below $50 a barrel. At that 
price it would be impossible to balance next year';s budget which is 
predicated at a price of $95 a barrel.   - - -- - - - -

There is compelling evidence that the crisis has started affecting 
ordinary people . The middle class has shrunk from 25% to 18% in the 
past few months alone.   Many companies are laying off jobs and doing 
so in a manner likely to cause resentment.    - - - - - - - - - (one 
redundant executive) was forced to sign a letter saying she had 
voluntarily resigned.   "They said that if I didn't sign I could look 
forward to burying my own children ,- - ,`I thought we were close to 
becoming a civilised nation, but I've been forced to realise it is an 
illusion."

Forecasts suggest that there is worse to come.  - - - - -