Thursday, December 01, 2011

Euro storm hitting Russia harder

The Economist blog, Free Exchange reports the growing evidence that the Eurozone crisis is sucking capital out of the peripheral European economies. Here in Estonia, we are inside the Eurozone, but there is certainly some increasing anecdotal evidence that suggest that Russia is being hit increasingly badly.

Colleagues who work with Russian investors suggest that there is a serious liquidity problem and that Russian banks are facing a funding strike. The impact of the de facto collapse of the Bank of Moscow in July has underlined concerns about a large number of smaller banks in Russia. In Lithuania, Bankas Snoras a bank that was owned by Russians, with a large client focus there has been declared bankrupt, and there are growing concerns about similar institutions in the Baltic region.

The Russian government, in principle, has a healthy funding balance, because the higher oil prices of recent years have allowed the country's reserves to grow substantially. However there is the unquantified impact of both corruption and mismanagement across the economy. There is considerable evidence of a huge capital flight, with large sums leaving the country through various off shore structures and being deposited in Switzerland and the UK, so that is hard to verify the precise state of financial health of many institutions.

The pressure that is on Western banks to control what they do even in Eastern European countries that are members of the EU has been substantial, with the Austrian monetary authorities demanding that their banks retrench their activities substantially. For Russia the situation is even bleaker. The impact of the political coup de theatre  of the return of Vladimir Putin has eliminated any doubts about the undemocratic nature of the regime, and Western governments are in no hurry to support bank operations there.

If there has been a severe credit crunch inside the EU recently, it seems that what is happening in Russia is potentially much worse, and with the growing realization of a slow down in China and renewed recession in the West, the price of oil is looking a lot less perky. That in turn is putting pressure on the Russian budget, which had been scheduled to grow substantially, not least because of a sharp rise in defence spending. In short, there is some evidence that the Russian economy is a lot more stressed than its headline numbers would make you believe.

No comments: