Download Russia Presentation - Wharton Finance Department

The graphs are not included here; source: Russian Economic Trends
http://www.hhs.se/site/ret/ret.htm (excellent source of information on Russia in
general).
What went wrong?
 Asian Contagion: reppraisal of risk, liquidity problems in investment
funds trading on international level, fall in world commodities prices.
 Commodities make up about 80% of Russians export. Commercial
deficit exacerbated by the adverse price movements in the world
commodity markets at the end of 1997 and into 1998. (Current
account balance: Q1 1997 + $3.9 bn vs. Q1 1998 -$1.5 bn.)
 At the beginning of the 1990s there is shift form direct Central Bank
financing of the government spending to privet sector loans in the
form of government short-term obligations (GKOs).
 Possibility of major fly into dollars by the local population.
(Hyperinflation recent past.)
 GKOs were indirectly used as a subsidy to the banking system
(negative real interest rates; $55 bn transferred in interests).
…We are talking about Russian financial crisis (1998)
 Political instability. March 1998: major changes in the government
(“young, radical reformers”). June 1998: large companies ignored
demands to pay their taxes; the Duma rejected many points of the
government’s agreement with the IMF; and once again, the banks
managed to convince the president to sack the government, rather
than allowing it to take radical measures to address their insolvency.
(The health problems of the president are not helping either.)
 June 1998, total household deposits stood at R165 bn (including R35
bn of foreign currency deposits). ¾ are held in Sberbank, the majority
of the rest is held in 5 privet banks).
…We are talking about Russian financial crisis (1998)
Russian banks entered the critical month of August
1998 with the following flaws in their books:
 Large number of non-performing enterprise loans. Official numbers
indicate 7% of total loans.
 Concentration of bad loans. 50% of the bad loans are on the books of
5 largest banks, which account for 1/3 of total lending to the
economy. Bad debts if banks lending to agriculture are estimated at
60% of their total loans.
 Concentration of risk. Large amounts of loans given to one borrower,
including the government of Russia. In July, Sberbank held about
50% of its assets in GKOs, and the rest of the banking system in total
held 10% of its assets in government bonds. In total approximately
$15 bn.
 Large amount of unhedged off-balance sheet forward contract: aprox.
$2 billion outstanding in non-deliverable forward contracts, taken out
by investors in short-term ruble debt in order to hedge their currency
risk.
 Rapidly increasing foreign currency liabilities, unmatched by foreign
currency assts. In July, foreign liabilities of commercial banks,
including deposits, exceeded their foreign assets by R115 bn and
accounted for 30% of all liabilities.
…We are talking about Russian financial crisis (1998)
First three weeks of August:
Central Bank is faced with two conflicting interests: bailing out the
banking system and defending the currency.
 Central Bank started to issue large amounts of credit. Official
numbers indicate aprox. R23 bn worth of credits to commercial
banks. Monthly average Jan-Jul 1998 was R7bn.
 Gross International Reserves fell by $5 bn.
 The amount of savings withdrawn form 30 largest banks rose to R17
bn (10% of total retail deposits in these banks) vs. R2 bn of the
previous month.
 In total Russian citizens managed to withdraw 18% or R30bn of ruble
deposits. At the same time, $1bn was withdrawn from dollar
accounts.
 The Central Bank allowed depositor of banks which hold over R300
mn in retail accounts (32 banks), to transfer their savings to
Sberbank. That made liabilities of Sberbank towards population
amount to R124bn, while its assets total was R200bn, half of which is
frozen government debt.
 On August 1, 1998 R0.001bn worth if stalled payments was
registered. In the third week of September 30 largest banks were
having R7 bn of stalled payments.
…We are talking about Russian financial crisis (1998)
Changes in monetary policy (August 17):
 An effective float of exchange rate. This replaces the old system of
pre-announced narrow daily trading corridor.
 An indefinite imposition of controls on capital accounts transactions.
Specially, non residents will not be allowed to invest into ruble assets
with the maturity of less than one year.
 A 90-day moratorium on repayment of debt to non-residents.
The moratorium does not include payments on the external debt of
Russian Federation (There are no sovereign debt payments due in the
period!).
 A lengthening of the maturity of all GKP and OFZ instruments
(rouble denominated short and long term government bond). The
trading on the GKO/OFZ markets are to be suspended.
…We are talking about Russian financial crisis (1998)
For the purposes of financial analysis and before a
restructuring program, Central Bank of Russia
divided all banks in four groups:
 (862 banks): banks with sufficient capital which are not experiencing
difficulties with liquidity management;
 (398 banks): banks which experienced problems mainly due to
financial crisis;
(Alarming number! Lobbying?)
 (15 banks): banks which experienced problems mainly due to reasons
other than financial crisis;
 (275 banks): insolvent banks with insufficient capital, liquidity
problems and lack of potential; (Liquidated by July 1999, deposits
transferred to Sberbank)
(*That adds to 1550)
Ironic Facts:
 Devaluation would leave only 30 of the country 1500 banks standing (Russia
Finance Minister, June 1998)
 Closing these 12 banks enables the government to impress its creditors
without shouldering any real financial burden (…) By one estimate more than
100 banks are now technically insolvent, and more bankruptcies must surely
follow, not just to improve the health of the banking system, but also to boost
tax collection. (The Economist, May 20th 1999).
 Up to date not a single banker was tried for fraud or asset-stripping. “Russia’s
cozy accounting practices have made life after death relatively easy”.
…We are talking about Russian financial crisis (1998)
The main problems stated by foreign investors and
importers are:
 High tax burden and unfair taxation combined with complicated tax
system;
 Lack of international accounting standards;
 Unclear and over-bureaucratic system of standards, licensing, and
certification;
 Crime and corruption;
 Unsatisfactory protection of property rights;
 Problems with customs and check-points.
…We are talking about Russian financial crisis (1998)