Sunday, June 10, 2018

The New Battle Cry: Divest From Russia

Visiting the blog of Nouriel Roubini hipped me to yet another of these seemingly endless comparisons of various countries' economic competitiveness based on "neoliberal" criteria involving the triad of liberalization, privatization, and deregulation in the realms of economic management, trade, and finance. Whereas the emphasis of the World Economic Forum (WEF) study is on the latter, all those areas are considered. To no one's surprise, Russia does not exactly do well in the areas of "corporate governance" (where Putin is the ultimate arbiter of governance), "legal and regulatory issues" (where Putin is judge and jury), and "contract enforcement" (where Putin can expropriate your sorry behind without much fuss).

There has been a stampede of foreign investors out of Russia given all the "political risk" surrounding the conflict between Russia and Georgia. As if it were not evident yet, the conflict seems to have removed the last vestiges of foreign investor adventurism in Russia. True, Russia has natural resources that cannot be found elsewhere in the world. That fact alone will probably ensure that its economic well-being is assured in the near future. That said, national industry will play an even larger role than it does now in the country's fortunes as justifiable foreign aversion sets in.

The Financial Times has a pair of informative stories on the matter. First, Putin denies the link between Russia's current economic turmoil and the Georgia episode, saying that markets the world over are taking their lumps. As you would expect, he is also saying that foreign money fleeing Russia is--you guessed it--"speculative" moves related to the housing bust's fallout elsewhere. There must always be a conspiracy, preferably involving evil-minded Westerners:

Vladimir Putin admitted on Thursday that foreign capital inflows could fall by up to 45 per cent this year, but rejected suggestions that turmoil in Russia’s financial markets was caused by the conflict in Georgia. The Russian premier said the country was simply suffering from the same credit crisis affecting the rest of the world, but he acknowledged that foreign inflows might fall this year from $80bn (€57bn, £46bn) in 2007 to $45bn or $50bn. Mr Putin blamed Russia’s outflow of capital on “speculative” moves by western institutions withdrawing funds because of the “mortgage crisis” in the US and Europe. But, speaking to western journalists in the holiday resort of Sochi, he denied there was a liquidity crisis and rejected the view that the turmoil had “anything to do” with the Georgian conflict. The stock market has fallen almost 50 per cent since May, and fell a further 2.7 per cent on Thursday. Alexei Kudrin, finance minister, said on Thursday that Russia was now considering using money from its $32bn national wealth fund and from pension reserves to support financial markets. Mr Putin played down the scale of the domestic liquidity problems, saying that when the state treasury had offered extra funds to commercial banks, the banks had taken up far less money than they could have done. In aggressive comments towards the United States, he said Washington had huge deficits whereas Russia had “a double surplus” on its budget and trade accounts.
Meanwhile, Russian Finance Minister Alexei Kudrin now suggests that some of Russia's accumulated oil wealth may go towards buoying Russia's ailing stock market, which has already fallen by half since May. Laissez-faire, eat your heart out:
Russia is considering using money from its $32bn national wealth fund and from pension reserves to support financial markets, Alexei Kudrin, finance minister, said on Thursday...“There are several proposals now for the banking community to improve the instruments that would allow [markets] to calmly work in this environment,” the minister told reporters. “Among these there is a proposal to place pension fund money and national wealth fund money on the domestic market.” Mr Kudrin added the money would be placed in securities.Sberbank, Russia’s largest bank, led the way down on Thursday with a fall of 7.4 per cent – signalling that instability in the financial sector is the key source of weakness. “There is a shortage of liquidity being felt, and the central bank of Russia is carrying out large-scale operations to refinance commercial banks,” said Sergei Ignatiev, chairman of the central bank.The central bank again injected more than $10bn (€7bn, £5.7bn) in short-term funds into the market on Thursday. The government has for months faced calls to use some of its windfall oil revenues to invest in order to stabilise domestic financial markets.Mr Kudrin’s comments are significant, as he had proposed the use of national wealth funds to support markets. Erik DePoy, equity strategist at Russia’s Alfa Bank, said Mr Kudrin was the “standard bearer for the conservative approach” of non-intervention. Any intervention by the fund in the Russian market “would be only symbolic. Even if they did $3bn, that is equivalent to one day’s trading. I think they’re just trying to talk up the market any way they can.” Despite the Russian stock market turmoil, Dmitry Medvedev, Russia’s president, chose Thursday to unveil a plan to upgrade the structure of the financial markets, which will be introduced as legislation next year. Mr Medvedev said laws on stock exchanges, clearing activities and a central depository centre were the first in the legislative pipeline.“This is in no way a simple period for the international markets,” the president told a Kremlin meeting of senior government and banking officials. “But this perhaps makes our agenda more relevant, not less relevant.”Intervention using the wealth fund would knock Russia’s sovereign rating if it proved to be more than an attempt to talk up the stock market, analysts warned. “If the government intends to put public funds at risk [funds originally laid aside to shore up the pension system], in order to prop up asset prices, then this would have negative implications for Russia’s rating,” said Frank Gill, head of European sovereign ratings at Standard & Poor’s. [Somehow, I don't think Russia is terribly concerned with external financing given still quite high commodity prices.]
Investing the fund’s money domestically would require changing the law, which created the entity in February with the purpose of buoying the country’s pension system. Chris Weafer, of Uralsib investment bank, said: “There is a group in government pushing for the money to be released domestically. But now that's shifting . . .  because there is a real risk the market fall will have a broader contagion. “Using the money domestically is a lesser evil. If they don't stop the market falling then the whole house of cards could collapse.” If authorities did not use the money now, “$40bn is not going to be of any use”.

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