Moscow News
www.mnweekly.ru
October 24, 2008
The buck stops here
By Ed Bentley
Countries hit by the ongoing financial crisis are frantically looking for loans to build foreign currency reserves and fund expensive bailout plans. Somewhat surprisingly?, several nations are looking to Russia for a lifeline. A $2 billion loan to Belarus was announced Tuesday, while talks with Iceland over a $5.4 billion package remain up in the air. Some leading analysts are now asking: Can Russia become an international lender of last resort?
The financial crisis has caused massive losses on stock exchanges, forcing bankers to meet margin calls. In the fallout, Iceland was particularly hard hit due to its top-heavy banking sector, whose assets are nine times larger than the country's GDP of $19 billion (508 billion rubles). As its reserves dwindled and its currency, the Krona, depreciated Iceland turned to Russia for a handout.
"We are positive about the request," Finance Minister Alexey Kudrin said soon after the news was announced.
In contrast to Iceland, Russia is in a good position to weather the financial storm. It has the third largest gold and foreign currency reserves, approximately $530 billion (14.1 trillion rubles), that accumulated booming oil exports. The Russian government appeared confident about the economy after taking additional measures to ease the crisis this week.
"Our economy is sufficiently prepared for lasting shocks," Prime Minister Vladimir Putin said Monday as the global community braced itself for a possible recession.
If more countries suffer difficulties similar to Iceland's, it is possible they will turn to Russia for rescue funds, according to Ovanes Oganisian from Renaissance Capital.
"Theoretically, it is possible (for Russia to fund more loans)," he told The Moscow News.
Negotiations with Iceland were seen by many as a gesture of goodwill to the West following tense relations over the conflict with Georgia. But there are some benefits to such loans.
"Advantages could include making money by lending to a sovereign at a higher yield then elsewhere among sovereign borrowers," Oganisian said.
Many countries would not consider turning to Russia for a loan, with the IMF and World Bank still in business.
However, some consider the IMF to be an outdated institution incapable of tackling the credit crunch. The strict conditions it imposes on loans recipients is sometimes a ‘cure' worse than the disease. Other recipients, like Russia, will never forgive what it believes to have been poor advice on the part of thelending organization.
Russian President Dmitry Medvedev criticized the IMF as an "ineffectual" institution during a speech at the St. Petersburg forum this year.
"International institutions responsible for global financial policies, the IMF in the first instance, have had virtually no influence over the strategies pursued by market players," he said. Many prominent economists have also attacked the IMF in recent years for its failures in Asia and Russia during the 1990s.
"The IMF has not, however, fully grasped that the conditions were often dangerously misguided, and often dealt with political issues that were beyond its mission," wrote Nobel Prize winning economist Joseph Stiglitz.
Russia could become an alternative source of loans, particularly for countries unwilling to meet the IMF's strict and much criticized conditions.
A more palatable approach for nations politically unwilling to accept a loan from Russia would be to boost their economies by accepting investment in their commercial assets.
"By recapitalizing the West, China and other emerging economies can preserve their export markets by helping the world's richest economies weather the storm and prevent a drawn out recession, or even depression," Linda Yueh, a fellow in economics at Oxford University told the BBC.
However, Russia's primary export is oil, the price of which is determined more by the dollar/euro exchange rate than conventional supply and demand. Investing in foreign commercial assets would have little effect on oil exports and could even destabilize the ruble.
"Investing in less liquid assets would decrease the ability of Russia to protect its currency," said Natalia Orlova, chief economist at Alfabank.
Russia, and other BRIC countries, has the ability to use their financial resources to become an engine of growth for the world economy, whether this is through loans or commercial investment. However, Russia must also be careful and keep some of its reserves safe.
"Reserves such as the national wealth fund could be used for commercial investment - but not all. Some reserves should be kept in very safe instruments incase of emergencies," concluded Oganisian.