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starbucks4ever (85.73)

It's not 1998



October 27, 2008 – Comments (5)

With all respect to S&P's downgrading (which they amply deserve: after all, they ARE right about 50% of the time :)), I suspect the rumors of Russia's default have been slightly exaggerated.

First, let's get the facts straight. Russia's sovereign debt is only 4% of the GDP, and there is no reason Russian government should default on this, unless NATO's provocations in Georgia and elsewhere make them CHOOSE to stop servicing their debts just to make a point. In all other scenarios this debt load is easily manageable.

Second, many Russian companies ARE now in vulnerable position. What's important to understand is that a bankruptcy of one or several companies, even the ones where the government holds a controlling stake, is not a bankruptcy of Russia. The government is not legally responsible for this debt, and it may (or may not) bail out overleveraged companies at its discretion.  

Third, Russian companies are illiquid, but they are not insolvent. There is no reason for them to go under, once the government helps them roll over their short-tern debt. The government doesn't need to assume the total 0.5 trillion debt of Russian companies. If it helps roll over the $150 billion due this and next year, companies should be able to service the rest using their internal resources. And the total expense of the government could actually be less, because there is really no need to rescue each and every company.

Fourth, let's not forget that despite all the excesses of putinism, Russia still has a capitalist economy, which has by now produced its own JPMs and BRK-As capable of re-capitalizing illiquid but solvent companies. Not everybody was overleveraged. Companies like Surgutneftegaz have plenty of cash, and could easily provide a part of the needed $150 bln.

Having said that, a $120-130 billion bailout is not the easiest choice to make, especially when commodity prices are tumbling. But putting things in perspective, its parameters would be comparable in all respects to the Paulson-Bernanke bailout, when you adjust for the relative size of the two economies. Considering that Russia has $500 billion of currency reserves and another $50 billion in its reserve fund, and has up till now run a healthy budget surplus (compare that with America's financial situation BEFORE the crisis), this bailout should be extremely expensive (no two ways to say that) but still affordable. In other words, unless the government mishandles its job too badly (and, at least as far as the financial part of the government goes, I don't see Kudrin and Ignat'ev as being any stupider than Paulson and Bernanke), Russia should emerge from the crisis badly bruised but still in one piece thanks to its accumulated reserves and to the early pre-payment of its sovereign debt. Actually, the crisis came in the right time. Things could really get out of control if the orgy of borrowing by state-owned enterprises had continued for another year.


5 Comments – Post Your Own

#1) On October 27, 2008 at 7:47 PM, LordZ wrote:

No money or soup for mother Russia...

she gets nothang...


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#2) On October 27, 2008 at 8:07 PM, starbucks4ever (85.73) wrote:

Will manage just fine. Medvedev's government is handling the crisis competently. The amount of liquidity on hand is adequate for the task, and those who sell now will be kicking themselves two years from today. The history of 1998 default will repeat itself as a farce. Things have been far worse during the last crisis: zero currency reserves, a team of economic saboteurs from the IMF, and a drunken clown as a president.

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#3) On October 27, 2008 at 9:37 PM, LordZ wrote:

Russia blows, their markets are in ruin, inflation runs rampant, and the corruption is so laughable except you run into the risks of them taking your assets and kicking you out if not taking your life.

Good luck investing in Russian businesses, nice score.


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#4) On October 27, 2008 at 9:49 PM, russiangambit (28.89) wrote:

LordZ, think about this, whatever Russia's issues are, it stabilized its economy , rebuilt its major cities, started growing industries, has several miltinational enterprises and a huge budget surplus, all in the last 10 years.

And the US accomplishments in the same time period?

Give credit where the credit is due, don't be so narrow minded.

If only Russia could manage to build the rule of law, which it never had in its 1000 years history, and eliminate corruption , which it always had.... Not in our life time , unfortunately.

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#5) On October 27, 2008 at 11:00 PM, starbucks4ever (85.73) wrote:

LordZ, you're thinking like one of those stupid Americans.

Why don't you put things in their proper context?

Russians don't care about the stock market. Maybe 50,000-100,000 people do. It's not the question of whose stock market has dropped more. The real point is that the Russians have lost nothing in their stock market crash, while the Americans lost several trillion bucks. When two cars crash, the question is not which one was going faster, the question is which driver has been driving without seatbelts.

Inflation is really pretty high. But for that, Russians had 8 years of real economic growth, while you only enjoyed some 2-3% a year, and even that growth was ficticious. 

Now, as to corruption...Here I agree with you 100%. Something should be done about it, and unfortunately I don't see it happening within our lifetimes.

The only consolation I can find is this: an honest American official who is honestly enforcing a criminal law can do more damage than the most corrupt Russian official who will just make you pay a bribe. :) I guess this is why Russian economy is growing while American economy is stagnant. :)


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