Over the last two months, liquidity in the banking sector has been drying up. It was a liquidity crunch that caused the crash in 2008, and the government was forced to bail out the banks to the tune of $66 billion to keep Russia’s financial sector afloat.
Happily, the Kremlin was successful, and the banking sector did survive (unlike in 1998). Hats off to the now-ousted Finance Minister Alexei Kudrin, thanks to whom Russia had about $600 billion in reserves.
Now liquidity is drying up again. If liquidity goes negative, bankers will start worrying about who is going to go bust, and that will mean lending between banks will freeze.
So, are we headed for the abyss? Certainly Russia is in a dangerous place, as confidence is clearly fading fast. It looks increasingly likely that the E.U. is going to try to ring-fence Greece and then let it default — the jolt this would provide to confidence could send Russia over the edge.
But if the shock does come, Russia is better prepared than it was in 2008. Knowing a shock is coming is winning half the battle, as one of the reasons that the economy froze in 2008 and hit Russia so much harder than Western economies was that the 1998 devaluation was fresh in everyone’s mind. So they simply stopped doing business until it was clear how the crunch was going to play out; the fact that Russia’s economy has bounced back so fast will go a long way to muting the impact of this round of crisis — if it comes.
Secondly, Russia is in a much stronger economic position than it was going into 2008. Most of the damage was done by the borrowing binge that preceded the 2008 collapse. Russian banks and companies had tapped international capital markets during the boom years. Worse, many companies had used their shares as collateral, which led to so-called “margin calls” during the very worst of the crisis. This time round there will be few, if any, margin calls, as the 2008 crisis squeezed all these deals out of the market.
Stepping back a bit further, big companies have been starting to borrow again, but a second lesson from the crisis has been that the debt profile of Russian companies and banks is much better than two years ago: Companies have lengthened the maturities of their loans to medium-term debt while swapping a lot of their foreign borrowing for ruble loans. As the Russian government has plenty of cash and the banks are dominated by the state, the government is in a stronger position to restructure debt if a company gets into trouble, as it can all be done “in house.”
But everything will depend on how well the E.U. manages the Greek problem. Surely, opting for a controlled Greek default is an extremely risky strategy and one that the less robust and more nervous emerging markets such as Russia will not welcome. Banks are built on trust, and defaults are by definition a betrayal of that trust. A controlled devaluation is a logistical exercise, but the trouble is that if it is badly managed then fear could get ahead of the control mechanisms; if this fear is large enough, even healthy banks can go bust. There is plenty of room for surprises, and these could easily lead to a meltdown.
Originally published at the Moscow Times.
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