Watch China - but also watch Russia

Russia Is Better Prepared for a Possible Global Downturn

New York Times,

August 17, 2011

MOSCOW — During previous bouts of financial volatility, Russia could be reliably found on the edge of the violent extremes. In 2008, for example, the Russian stock market was the worst performing of any major stock exchange in the world. The ruble collapsed. And the rich industrialists known as the oligarchs suffered $230 billion in paper losses.

This time is different.

While the Russian economy is still vulnerable to the vicissitudes of global capital and commodity moves, it is in a far better position to weather the effects of a fresh recession in Europe or the United States.

Russia is not immune, of course. The European sovereign debt crisis, exacerbated by Standard & Poor’s downgrade of the debt of the United States, caused a sell-off in the Russian stock market, but it hardly went into its typical free fall. The Micex index fell 17 percent from Aug. 1 until Aug. 10.

While drastic, it was about the same as the peak-to-trough decline of the Standard & Poor’s 500-stock index over the last month, and Russian stocks have recovered somewhat over the last few trading sessions.

The ruble declined 7.5 percent against the dollar in 11 trading days, but then rebounded Monday, the most it has climbed in any single day in more than a year and a half.

One reason for the new resilience is that Russian private sector debt is only a fraction of what it was in 2008, after the oligarchs had quietly bulked up on Western loans collateralized against their companies’ shares.

This buildup of debt set off a cascade of margin-call selling in Russia, accelerating the collapse of the market. These debt levels are no longer widespread here.

Also, Russian banks have gone from being net debtors to net creditors.

“The situation with debt has changed dramatically,” Vladimir Tikhomirov, chief economist at Otkritie, one of Russia’s largest financial firms, said in a telephone interview.

In the fourth quarter of 2008, $80 billion in corporate and bank debt came due to foreign lenders, he said. Since then companies have paid down and extended the maturities of debt. In the fourth quarter of this year, only $35 billion will come due, giving companies a good deal more leeway to handle a downturn.

One sign of this change came from Oleg V. Deripaska, the metals and automobile tycoon whose hugely leveraged business came to symbolize the oligarchs’ debt binge and its aftermath in the recession. He announced without fanfare on Tuesday that he had restructured a $4.5 billion loan from the Russian bank Sberbank, extending its repayment period.

To be sure, Russia is hardly a haven, and never will be, as long as it continues its reliance on volatile commodity exports.

In the 20 years since the breakup of the Soviet Union, the Russian stock market has been either in the top five performing markets in the world or the bottom five in every year except one, according to estimates by Renaissance, an investment bank in Moscow.

“Russia has always been a big cyclical market,” Kingsmill Bond, the chief Russia strategist for Citigroup, said in a telephone interview from London. And despite its stronger starting position now, it is still vulnerable to a drop in the price of oil.

“If the situation in Europe worsens, and we get major recessions materializing, that would impact the oil price, and Russia would be damaged,” he said.

Mr. Bond has estimated that for each $10 drop in the average annual price of a barrel of oil, Russia loses 1 percent of its gross domestic product.

Russia can ill afford a sharp decline in the price of oil because, though the oligarchs and their businesses are carrying less debt, government spending has increased well beyond current tax receipts from oil export tariffs and mineral extraction fees.

In 2008, the Russian budget was intended to run a surplus at oil prices above $60 a barrel. But now, the Russian government estimates it will need to collect taxes on oil at prices above $120 a barrel to balance the budget. As they are already below that level, the finance ministry is borrowing from domestic and foreign investors.