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Gazeta.Ru
April 5, 2004
April Fool's Day no laughing matter for Russia's economy
By Sergei Nasidze

Russia’s thriving financial market is increasingly swamped with junk bonds, while the risks are submerged in the general euphoria that has come with the vast sums of spare cash that is now available.

April Fool’s Day jokes vary. Some are funny, others are sad, and then there are people who are just not in the mood for jokes. Such was the case with the Russian Central Bank, which released another set of figures that is unlikely to raise many smiles: in 2003 the country’s debt to non-residents grew 18.8 percent to the rather impressive sum of $182 billion.

Against the background of a proclaimed economic upturn, it would be nice to know at what expense and why exactly all this is happening.

Not so long ago the idea of using gold reserves for investment purposes was very popular. Adherents of that idea (the absurdity of which was discussed many times afterwards) voiced concern over the vast sums of money that found no use in the economy.

Then they discussed the financial reserve which was far from scanty and the freshly established stabilization fund. The general message of the statements on the matter was similar: that’s all very well, but, gentlemen, tell us how to use the money.

And this is what we get. Over 2003 we borrowed another $30 billion. The structure of the borrowing shows that most loans were extended to banks and companies.

Hence, Finance Minister Alexei Kudrin’s statement that the government would have no problems repaying its foreign debt sounds realistic, especially considering the solid gold and currency reserves as well as financial reserves.

As regards the banks, however, the prospects are not that straightforward.

For instance, in the period January 2003 ­ January 2004 the foreign debt of Russia’s banks grew 75 percent. It is understandable that when money is considerably cheaper abroad than it is in Russia, it becomes more profitable for banks to borrow there.

Indeed, the situation has been very favorable. Banks borrow currency cheaply and then sell it, generously crediting the national economy in rubles. Given the considerable strengthening of the Russian ruble last year, the effective rates for attracting resources were downright trifling.

In fact, they needn’t have bothered extending loans at all ­ currency speculation fully offset the cost of borrowing abroad. The only problem is that this could not go on forever.

The risks increase substantially when the question of where to invest money becomes the crucial one. Bank loans become available to a wider circle of debtors who feel quite at ease, because even if they face difficulties servicing the debt, there is always the possibility of refinancing; that is, borrowing from another source.

On the other hand, with the thriving corporate securities market being increasingly swamped with junk bonds, the risks for the issuers are submerged in the general euphoria brought about by the vast sums of spare cash available.

At the same time, by virtue of the imperfections in the banking system, considerable resources accumulated by commercial banks are not being used to credit the real sector, but are simply amassed in the form of unprofitable investments.

Such a situation is directly opposite to what the Central Bank is striving towards when implementing its monetary policy.

The strengthening trend of the ruble, which, incidentally, will facilitate the Bank of Russia’s task of buying currency and curbing inflation, spells a serious test for the financial markets.

So what is the financial euphoria based on? It’s nothing supernatural: it’s based on high prices for Russian export goods and the monetary policy of the US Financial Reserve System.

Clearly, such a situation is far from balanced. And while the government has its stabilization fund, all that the banks have so far is a low refinancing rate abroad and high oil prices. The main question is for how long.