Is Russia a Banana Republic?

[zeytuntsi]

Re: Is Russia a Banana Republic?

Russians Who Invested in 'People's IPOs' See Their Savings Vanish

By Philip P. Pan
Washington Post Foreign Service
Friday, December 12, 2008; A01

MOSCOW -- Anatoly Sisoyev always considered himself a patriot. As a child, he lost his father to an accident in the Soviet space program. As an adult, he served 30 years in the military, retiring at the rank of major. His son followed him into the army and was killed in Chechnya at the age of 18.

Through it all, he said, his faith in the Russian government never waned.

So when he heard radio ads two years ago encouraging citizens to invest in the initial public offerings of state-owned companies, Sisoyev lined up to buy shares, first in the oil-and-gas giant Rosneft and a year later in the nation's second-largest bank, VTB.

Sisoyev had suffered in Russia's rocky transition to capitalism, but the "people's IPOs," as they were billed by the Kremlin, seemed different. Then-President Vladimir Putin endorsed the stock offerings, presenting them as a chance for ordinary Russians -- and not just the wealthy -- to own a piece of the booming economy.

Now, as Russia confronts its worst economic crisis in a decade, the value of Sisoyev's shares has plummeted, wiping out most of his life savings. At 65, he is working as a part-time security guard because food prices are climbing faster than his meager pension. In a recent interview, he buried his face in his hands and fought back tears as he explained how he is trying to treat his sick wife by reading old medical textbooks because he can't afford a good doctor.

"I believed in the state, especially under Putin, so I bought shares," said Sisoyev, a soft-spoken man with white hair and a soldier's posture. "Now I don't believe in anything."

Swayed by years of steady growth -- and by an aggressive, state-funded marketing campaign -- hundreds of thousands of Russians ventured into the country's young stock markets to buy shares in the "people's IPOs." Now these first-time investors, many of them elderly pensioners like Sisoyev, are among those suffering the most as Russia's economic problems enter into a more painful phase.

Limited largely to the financial sector and the wealthy elite at first, the crisis is beginning to be felt by the broader population. Inflation, wage arrears and unemployment are on the rise, and in a recent survey, one-fifth of Russians said they or a family member worked for a company that had announced layoffs.

Putin, now prime minister, has responded largely by channeling funds into the banking system and providing emergency loans to the billionaires, known as the oligarchs, many of whom are struggling to pay debts to foreign creditors. The bailout has allowed the Kremlin to take greater control of industries that Putin has long argued never should have been privatized after the fall of the Soviet Union.

But as the state spends tens of billions of dollars aiding and gaining leverage over these tycoons, it has all but ignored the ordinary Russians who invested in the "people's IPOs." They present a political risk for Putin because their situation undermines the narrative he has used to win support and consolidate power -- that of the strong leader who delivered broad-based prosperity to Russia after years of turmoil during which oligarchs plundered the state.

The "people's IPOs" were designed in part to reinforce Putin's populist image. The three state firms involved -- Rosneft, VTB and the nation's largest bank, Sberbank -- could have done what companies going public usually do and focused on the institutional investors and wealthy individuals who own the vast majority of trading shares in Russia. Instead, Putin publicly instructed the firms to make sure the masses could buy stock, too.

The economic goal was to expand the country's tiny base of retail investors and develop its fledgling stock markets. But the approach also allowed Putin to draw a contrast with the chaotic privatization efforts of the 1990s, during which a small number of entrepreneurs took control of assets worth hundreds of billions of dollars.

In Rosneft's case, the IPO was also seen as part of a strategy to legitimize the company's controversial acquisition of the assets of the Yukos oil empire after the Kremlin jailed its chief, Mikhail Khodorkovsky, then Russia's wealthiest man and a prominent Putin critic.

Some foreign investment funds declined to put money into Rosneft because of legal and moral concerns -- critics compared the IPO to buying stolen goods -- but many Russians like Sisoyev saw its control of the Yukos oil fields as a selling point.

"I was hoping for justice," Sisoyev recalled. "With all the natural resources in the country, our lives should be much better. Instead, only a few people had benefited. I hoped the IPO meant a more fair distribution of profit."

Rosneft sold 15 percent of its shares in London and Moscow in July 2006, raising more than $10 billion. The "people's IPO" represented only a fraction of the total but exceeded expectations, with 115,000 people investing $790 million. Lines were so long the company said it could have raised three times as much if it had extended the deadline for purchases.

Nine months later, about 46,000 people purchased $800 million in shares in the IPO of Sberbank. Then, in May 2007, VTB staged the largest "people's IPO," raising $1.5 billion from 131,000 investors. Bank branches in more than 100 cities stayed open late and on weekends to meet the demand.

Sisoyev invested about $8,400 in Rosneft and VTB, almost all he had managed to set aside after the 1998 financial crisis wiped him out. The amount equaled 2 1/2 years of payments from his military pension.

"I was desperate to save money," he said, adding that he was wary of putting his nest egg in a bank and that inflation was destroying its value. "I needed to secure it, especially for retirement, because I knew my ability to earn money would decline." At the same time, his family's medical expenses were rising. His wife had suffered two heart attacks, and doctors told him he needed a spine operation.

The "people's IPOs" seemed like a safe investment, Sisoyev said, because the government was the majority shareholder and he believed it would never let the stock price fall too far. An upbeat ad campaign that appealed to patriotism and highlighted the companies' potential for growth reinforced that impression.

According to Russian media reports, the state spent millions marketing the IPOs. In one ad, a farmer building a new house explains his success to a neighbor digging up potatoes. "An IPO is when entirely new shares are sold in the market at a fixed price," he says. "In a few years, the business climbs and the shares go up. It is very profitable."

"What a life," the neighbor responds. "Some get everything, others nothing!"

Though the vast majority of Russians decided against investing, those who had heard more about the IPOs were much more likely to buy shares, according to a survey by the National Agency for Financial Research examining the impact of the campaign. "State support" for the bank was among the top reasons cited.

"I was hooked by the advertising," said Elvira Kudryashova, 66, a pensioner in Volgograd who invested her life savings in VTB and now struggles to make ends meet as a part-time teacher. "I didn't understand anything about the process. . . . To me, it was a safe investment because it was backed by the state."

Putin has been closely associated with the IPOs. In December 2006, he was shown on television telling finance officials to do everything possible "to give people the chance to buy these shares." At a news conference two months later, he cautioned that "investing in securities is always risky" but added: "The economic foundations of our national companies are very sound, and all those who have made an initial stock offering are stable economic actors. . . . I have no doubts that these are good investments."

In April 2007, VTB announced its IPO at the presidential residence. "Tens of thousands of citizens will be able to become shareholders," the bank's chief, Alexei Kostin, told Putin. "This is the goal you have set, and I hope we will reach it."

When VTB shares began slipping weeks later, Kostin urged patience and told investors the government would "step in to prop them up." But as the global financial crisis has hit, Russia's stock markets have fallen harder than most, and VTB is now down almost 80 percent from its IPO price. Sberbank has fallen nearly as much, and the value of Rosneft shares has declined more than 50 percent.

Public anger has been evident at shareholder meetings, with crowds filling conference rooms to berate company executives, including Deputy Prime Minister Igor Sechin, the Rosneft board chairman and one of the Kremlin's most powerful figures. Shareholders have accused the firms of corruption and waste, questioned the salaries of executives, and demanded higher dividends and a buyback of their shares at the original price.

"These IPOs made sense in theory, but they wanted the money without the responsibility, without recognizing the rights of shareholders," said Alexei Navalny, a lawyer and political activist who has been organizing minority shareholders. "Naturally, an investment is a risk, but the state is the main shareholder of these firms and is responsible for their performance. So the state should at least begin discussing buying back shares."

Sberbank and VTB did not respond to written questions. Nikolai Manvelov, a spokesman for Rosneft, defended the "people's IPO" as "the first example of a completely fair and transparent privatization process in modern Russian history."

"The fact that the Rosneft share price is currently significantly below the IPO level is due to the global financial crisis and has nothing to do with the fundamentals of the company," he said, noting that the stock was outperforming its main Russian rivals.

Sisoyev, whose shares are down 60 percent, said he has tried to contact Putin several times to plead for help, without success. "There was so much anger that now I'm sort of numb and fed up. I don't know what I'll do," he said. "If I had the money, I'd move to another country, maybe Germany. I have friends there, and they say those we defeated in the war now get pensions 60 times those of the victors."

Researcher Anna Masterova contributed to this report.

http://www.washingtonpost.com/wp-dyn/content/article/2008/12/11/AR2008121103830.html?hpid=topnews

[zeytuntsi]

Re: Is Russia a Banana Republic?

The situation is getting worse by the day.

http://seekingalpha.com/article/110920-russia-s-economic-and-financial-meltdown-continues-swiftly

Russia's Economic and Financial Meltdown Continues Swiftly


Russia's foreign-exchange reserves have been declining very rapidly since mid August, and as the money goes, so does the faith that the large stock of reserves the country built up during the boom times would be sufficient to see them through any downturn in energy prices. As the money leaves, so it seems does the decade of economic growth and stability which they symbolised.

Indeed so rapid has been the decline, that Russia's international reserves, which are the third-biggest after those of China and Japan, have now fallen $161 billion, or 27% percent, since 8 August last, and decreased by $17.9 billion to $437 billion in the week of 5 December. Investors have now pulled $211 billion out of the country since August, according to estimates by BNP Paribas.

But just how difficult managing this process is proving to be was illustrated yet again this morning, as Russia’s central bank found itself forced to accept a further devaluation in the ruble - for what is now the second time in only a week. This subsequent to which the ruble fell as much as 1.3 percent (to a four-year low of 37.5015 per euro) as Bank Rossii widened the trading band against the basket of dollars and euros used by the bank as the measure for attempting to manage the exchange rate.

Russia has now used some 27 percent of its reserves in these attempts to stem what has now become a 16 percent decline in the ruble following a 69 percent drop in the price of oil and last week's decision by credit ratings agency Standard & Poor’s to cut its Russian credit rating for the first time in nine years.

Thus over at Bank Rossii they have been having their work cut out "flexibilising" the trading band, and it is this flexibilisation process that has now allowed the ruble to fall against its target exchange rate against a basket of currencies by 8.6 percent, down further from the 7.7 percent level facilitated last week and the 3.7 percent of one month ago. Thus the currency has now fallen a net total of 5.9 percent against the basket in the series of six "adjustments" to the trading band implemented since 11 November.

However, this "slow and steady" approach to devaluation is creating uncertainty, as well as fomenting a loss of confidence with Russians withdrawing a total of 6 percent from their ruble accounts in October alone, the fastest rate of withdrawal since Bank Rossii started collecting this data two years ago, while foreign currency deposits rose 11 percent. Thus instead of reinforcing confidence in the monetary regime, the slow, step-by-step adjustment of the nominal exchange rate may be perpetuating a steady stream of deposit withdrawals and dollar purchases, and some evidence for this can be found in November's 5.9 percent contraction in the money supply.

Apart from the financial turmoil, Russia's economy is really reeling under the weight of the sharp drop in crude prices, and the price of Urals crude, Russia's main export blend, is currently trading at around $44.13 a barrel, down 69 percent from the July peak, and well below the $70 average required to balance the country's 2009 budget.

GDP Growth Slowing Rapidly

It is hard to get a fix at the present time on what Russia's growth rate will look like in 2009, and estimates vary widely. Deutsche Bank recently cut its Russian growth forecast to 1 percent for next year, down from an earlier 3.4 percent, while the World Bank last month forecast a slowdown to 3 percent from what has been an average expansion of 7 percent a year since 1999.

At the bottom end of the forecast range we have Oleg Vyugin, chairman of MDM Bank and a former central banker, who suggests the economy may contract by as much as 4% if the prices of raw materials exports do not recover. My own feeling is that the final figure may well be much nearer to Vyugin's estimate than to the World Bank one, especially if we don't get a strong rebound in commodity prices and given the sharp contraction in non-energy industrial output.

Analysts at OAO Sperbank have gone one step further and come up with two scenarios for possible impacts of the economic slump on property prices. For the first (or mild case) scenario they postulate a 2.5-3.5% growth in GDP, 11% inflation and a 30 ruble per dollar exchange rate in 2009. In this case, the bank anticipates a drop in Moscow real estate prices of 34.4% in ruble terms and 46.6% in dollars. On the second scenario GDP stagnates (or even contracts by up to 2.5%), there is higher inflation and an even larger devaluation of the ruble against the dollar. In this (worst) case scenario the Bank suggests that Moscow property prices would plummet by 38.1% in rubles and 59.6% in US dollars. You have been warned!

The Inflation Worm Is At The Heart Of The Problem

The real difficulty facing Russia's macroeconomic managers is that after two years of shocking inflation domestic industry is in no position to compete with its overseas competitors while the ruble remains at its present rate, while any sharp devaluation will have a serious impact on the balance sheets of those who took advantage of cheaper interest rates available abroad to do their borrowing using forex loans.

This situation is not that different from that which is to be found in many other economies across the region, in Latvia, Hungary, Ukraine and Romania (for example), with the added rider that the IMF representatives who are in dialogue with policy makers in these very fragile economies would do well to bear in mind the potential knock-on effect of any downward coming adjustment in the ruble.

In annual terms inflation is now slowing, and was down to 13.8% in November, from 14.2% in October. Still, these are very - unacceptably - high numbers, and those who so willingly acquiesced in them earlier will now feel the downside of their negligence, although unfortunately it is - as ever - the poor old Russian in the street who will really pick up the bill.




Basically, the credit driven consumer boom which accompanied the commodities one severely distorted the always delicate balance between Russia's commodities and manufacturing sectors, leaving the manufacturing sector strongly uncompetitive. It is this lack of competitiveness which now exacerbates the severity of the downturn, just as many commentators, including yours truly, were arguing it would do. Frank Gill from Standard and Poor's puts it like this:

Accompanied by generous government spending, the credit boom also fueled inflation, which weighed on the competitiveness of Russia's noncommodity sector. As wage growth averaged nearly 30 percent over the last two years and the ruble-denominated cost of production rose, domestic manufacturers found it very difficult to compete with cheap high-quality imports. As a consequence, entrepreneurs logically avoided manufacturing and, instead, invested in much more profitable and more import-intensive sectors, such as banking, retail and construction.

The resulting structural imbalances were well camouflaged by the extraordinary growth in energy and other commodity prices. For six straight years, the earnings from Russian oil and commodity exports on world markets have increased much faster than the cost of imports, offsetting the less flattering volume effects.

From 2003 through this year, the cumulative difference between export and import price inflation in Russia was a fairly remarkable 74 percent. This put upward pressure on the ruble, encouraging borrowers to take loans in dollars or euros at negative real interest rates, under the assumption that the ruble would appreciate indefinitely. But it also provided an important source of financing.
Frank Gill, director of European sovereign ratings at Standard & Poor's in London, writing in the Moscow Times.

The critical part of the overheating process was to be found in the evolution of real wages which continuously outpaced productivity growth, thus undermining competitiveness. According to Rosstat, average real wage growth in the first nine months of 2008 was 12.8 percent, down from 16.2 percent during the same period in 2007 (see chart below). Meanwhile, unemployment has continued to decline, and reached 5.3 percent in the third quarter, suggesting that at that point the economic slowdown had still not reached the labour market. But this is expected to change quite dramatically now, as the credit seize up and construction slump lead to lay offs in one enterprise after another.



The Russian government has implemented a programme - worth about $200 billion - involving a mixture of loans, tax cuts and other measures to boost liquidity and reduce borrowing costs as the 50-stock RTS Index heads for its worst year since 1998, while the ruble denominated Micex stock index is down 64 percent since 1 August.

``It's a vortex of despair,'' said Julian Rimmer, head of sales trading at UralSib Financial Corp. Russian stocks are weighed down by ``an economy rendered sclerotic by the vanishing of credit, a market paralyzed by margin calls and illiquidity, the opacity of earnings through 2009 and the ruble quivering while speculators circle''.

Finance Minister Alexei Kudrin has said the government has already spent 90 billion rubles ($3.3 billion) out of the available total of 175 billion rubles set aside for investing in domestic stocks and bonds. VTB Group (Vnesheconombank), Russia's second-biggest bank, lent 190 billion rubles ($6.9 billion) to companies in November alone as part of the plan following the supply of 120 billion rubles to what Finance Minister Alexei Kudrin termed the "real sector" (or non financial companies) in October.

FDI Drying Up?

Russia's supply of foreign direct investment seems to be steadily drying up. During the first nine months of this year the country attracted 2.3 percent less foreign direct investment than it did in the same period in 2007 as the global credit squeeze reduced investor appetite for emerging market projects. Direct investment was running at $19.2 billion over the period, while total foreign investment, including credits and flows into securities markets, was $75.8 billion, a drop of almost 14 percent over 2007, according to the most recent data from the Federal Statistics Service. Foreign investment in stocks and bonds fell 16 percent to $1.3 billion. Foreign direct investment was at a record $27.8 billion in 2007, up 100% over 2006, and thus the fall has not been that dramatic, so far, but the numbers for the last quarter will undoubtedly be much worse than those for the earlier part of the year.

(See part 2 below)

[zeytuntsi]

Re: Is Russia a Banana Republic?

http://seekingalpha.com/article/110920-russia-s-economic-and-financial-meltdown-continues-swiftly

Russia's Economic and Financial Meltdown Continues Swiftly - Part 2



S&P Downgrade

Russia’s long-term debt rating was lowered earlier this month - for the first time in nine years -by ratings agency Standard & Poor’s, who cited capital outflows and the “rapid depletion” of the foreign currency reserves as their justification. Russia's rating was cut one level to BBB, the second-lowest investment grade, and down from BBB+. The last time S&P downgraded Russia was in January 1999, when the country had a rating of SD (or ‘selective default’) following the government's decision to default on $40 billion of debt. Russia’s outlook remains “negative.”

“The rapid depletion of reserves in order to resist a more substantive adjustment of the nominal exchange rate increases the chances of discontinuous exchange-rate movements later, at a lower level of international reserves, with even more severe consequences for the private sector,” said Frank Gill, S&P’s primary credit analyst in London, in the statement.

S&P said it expected Russia’s current-account surplus to swing into a deficit equivalent to 2.6 percent of gross domestic product next year, compared with a surplus of 5 percent in 2008 due to a “sharp deterioration in the country’s terms of trade”. Russia’s GDP growth is expected to decline “sharply” in 2009, according to the agency.

Energy, including crude oil and natural gas, accounted for 73 percent of exports to countries outside of the former Soviet Union (not counting the three Baltic states), in the first 10 months of this year, according to data from the Federal Customs Service, while the federal budget is likely to “shift into deficit” as the government implements emergency tax cuts, commodities prices remain low, and a weaker economy generates less tax revenue, according to S&P.

Russia’s budget surplus amounted to 7.8 percent of GDP in the first 10 months, according to Finance Ministry data, but so sharp is the turnaround that Russia may need to use most, or even all of the money in its two oil funds to cover the budget deficit and recapitalize banks should oil prices stay at around current levels. These funds - the National Wellbeing Fund and the Reserve Fund - held a combined $209 billion as of 1 December.

Moody’s Investors Service also changed Russia’s rating outlook at the end of November - to stable from positive - citing their opinion that the defense of the exchange rate has been "ineffective and extremely costly for official reserves".

“Russia is now facing a perfect storm of falling commodity prices, weaker external demand, tighter credit conditions and slower real incomes growth for which no amount of currency adjustment can compensate,” Neil Shearing, an emerging-markets economist at Capital Economics Ltd. in London, said in a research note today.

Russia's response to the crisis seems to be what might be termed a "process in development", with new measures being continuously announced. In one of the latest such "developments" Finance Minister Alexei Kudrin said the government is thinking of using some of the funding to buy bank mortgages and will also provide 300 billion rubles ($11 billion) to guarantee corporate loans in a bid to boost liquidity.

“In order to strengthen guarantees for loans, including loans for two and three years, the state must be ready to provide 300 billion rubles,” Kudrin said in a televised broadcast on the Russian state channel Vesti-24. “If necessary we can increase this limit.” Thirty billion rubles in loans are also to be provided to large airlines like Aeroflot and Transaero, according to First Deputy Prime Minister Igor Shuvalov, while Vnesheconombank, Russia’s state-run development bank, has now requested a total of 950 billion rubles ($34 billion) in government funds. To put all this in perspective, the latest amount requested by VEB represents more than 7.5 percent of Russia’s foreign-currency reserves.


Services And Manufacturing Contraction


Russia's real economy is shrinking very rapidly under the weight of all this. Russian service industries shrank in November at the fastest rate on record, and the VTB Bank Europe Services Sector Purchasing Managers’ Index was in contraction mode for a second consecutive month (registering 37.2, a sharp acceleration in the rate of contraction from the 47.4 reading in October). On such indexes a reading of 50 is the dividing line between expansion and contraction. The contraction in service industries was “by far” the biggest since the survey began in October 2001, according to the VTB statement. “Activity, new business, employment and backlogs all registered much steeper contractions than in October.”



VTB Group’s Manufacturing Purchasing Managers’ Index also showed a decline in November, this time for the fourth consecutive month, and the index registered a record low of 39.8, even lower than that of September 1998, when Russia defaulted on $40 billion of domestic debt and sharply devalued the ruble.



The manufacturing reading is also confirmed to some extent by the November industrial output data from Rostat, since output contracted year on year by 8.7 percent after a 0.6 percent rise in October. Production shrank for the first time since new methodology was introduced in 2003 and, again, this was the biggest decline since 1998.

Manufacturing fell an annual 10.3 percent compared with growth of 0.3 percent in October. Steel pipe production dropped an annual 36.9 percent and coking coal output fell 38.7 percent. Truck and car production dropped 58.1 percent and 7.2 percent respectively. Russia’s largest steelmaker, OAO Severstal, have announced they are cutting output by half and plan to reduce spending 20 percent in 2009, while Ford Motor (F) announced on 8 December it was closing its St. Petersburg factory between 24 December and 21 January.


Is Russia On The Brink Of Outright Recession?

Russia may well already be in its first recession since 1998, according to what may well have been a slip of the tongue by Deputy Economy Minister Andrei Klepach while Evgeny Gavrilenkov, chief economist at Troika Dialog, estimates that the world's largest energy exporter may already be running a current account deficit.

“The recession has already begun and, I’m afraid, it won’t end in two quarters,” Klepach said in comments made in Moscow today that were confirmed by his press secretary.

Klepach added that the economy would grow by less than the ministry’s current forecast of 6.8 percent for 2008, and that industrial output growth will slow to around 1.9 percent for the whole year.

Gross domestic product growth dropped to 6.2 percent in the third quarter, and this was already the slowest pace in three years. Russia’s economy last fell into recession in the first quarter of 1998, and only returned to growth in the second quarter of 1999. Growth has averaged over 7 percent a year since 2000.

As I said, Klepach's declaration may well have been a (Freudian?) slip of the tongue (or tongue twister) since he later qualified his statement, saying there had been some linguistic confusion given that the Russian words “retsessiya” (recession) and “spad” (decline, slump) “mean the same thing". "This isn’t a technical recession in the American sense” he said - referring to the fact that a recession is often defined as two consecutive quarters of negative growth.

Actually, the sticklers among us will note that the two quarters negative growth rule of thumb is not in fact the U.S. criterion (since the NBER business cycle dating committee use their own "in house" methodology, as I explain in applying this methodology to Spain here), but he may be right, and what we have on our hands may best be termed a "slump" rather than a recession, but which ever it is, of one thing I am sure: the contraction has already started.

Whatever the confusion, what Klepach did make clear is that he expected Russia’s economy to grow by only 2.6 percent year-on-year in the fourth quarter (giving total growth for the year of 6 percent) and this does seem to suggest that the economy is already contracting on a quarter on quarter basis.

Equally worrying is the evolution in the current account deficit. The full impact of the fall in oil prices will only be noted in the trade and external current account data in the fourth quarter, when export deliveries based on the new lower oil prices will be affected. But to this evident oil price impact we need to add the fact that the non-oil external current account deteriorated significantly in 2008 as import volumes shot up considerably faster than non-oil exports (the competitiveness problem). In the second quarter of 2008, the non-oil external current account deficit reached almost US 60 billion, and this was followed by a further US 62 billion in the third quarter, making Russia’s balance of payments position particularly vulnerable to a continuation in the low level of oil and gas prices.

We also need to consider the problems Russia may now have in financing any such current account deficit (remember this is one of S&P's concerns). The World Bank estimates Russia’s external debt maturing in the third and fourth quarters of 2008 at around US 100 billion, of which about US 45 billion is due in the last quarter of 2008. After including on-demand deposits held by the banking sector, the total debt that requires repayment or refinancing may well exceed US 120 billion. The external debt maturing for the entire 2009 fiscal year is slightly less, at around US 100 billion.

It is clear, however, that some sectors, especially private financial corporations, are going to face challenges in rolling-over their external debt under current conditions. Further, higher prices for debt refinancing are inevitable, and to all of this you need to add-in the sharp drop in the stock values used as loan collateral which will have resulted in sizeable margin calls on lending facilities with 1-2 year maturities.

All in all, the World Bank reached the conclusion that the total debt due in the fourth quarter of 2008 could amount to about US 60-65 billion. Even so, they concluded that systemic risk to the banking sector, while rising, remained limited due to the government’s resolve in supporting the systemically important banks and the sizable package of measures taken to date. It is hard to assess whether or not they are right in this evaluation, but in any event we are all just about to find out, so those of us who don't especially like mysteries won't have too long to wait.

[zeytuntsi]

Re: Is Russia a Banana Republic?

Typical of a banana republic.
The situation has gotten much worse since 2007 and Russia's economic meltdown will make it even worse

http://www.guardian.co.uk/world/2007/mar/15/russia.lukeharding

53 billionaires, £100bn in the black, but for Russia's poor it is just getting worse
Petro-dollars fail to trickle down to pensioners, jobless and government workers


Standing in his fetid kitchen, Sasha Ivanovich shows off a bucket of muddy potatoes. Dug from his snow-encrusted garden, they are his lunch. In fact they are his supper too as, he points out, he has nothing else to eat.

"Everything has got more expensive. Bread has gone up. Cigarettes have gone up. My sister pays my gas bill. I can't afford vodka. Can you give me 100 roubles [£1.97]?" he asks, hopefully.

Since Vladimir Putin took power seven years ago, Russia has enjoyed growing prosperity. The days when the country was forced to borrow billions from the IMF, devalue the rouble, and beg for international help are a fading Yeltsin-era memory.

Instead, Russia has so much money that it doesn't know what to do with it. Last month President Putin boasted that the country had paid off its $22bn (£13bn) foreign debt. Rising oil and gas prices have transformed its economic fortunes and made it a resurgent global force.

The Kremlin is now sitting on a vast mountain of cash, coyly known as the stabilisation fund. Last week it topped $103.6bn. (Others suggest Russia's total surplus is more like $300bn.) And the American magazine Forbes recently revealed that Russia has 53 billionaires, 20 more than last year.

Unfortunately none of this has trickled down to Sasha, 56, who lives alone in a wooden cottage, and whose poor sight renders him unfit for work. Like many at the bottom of Russia's pile, Sasha survives not through the generosity of the state but thanks to his kindly neighbours.

His home, in the village of Lavrov, is a 45-minute drive from the town of Oryol in south-west Russia, past forests of silver birch. The young people have all left and most of the older men appear to have died - hardly surprising in a country where male life expectancy is 58. Like much of rural Russia, Lavrov appears to be on its last legs, along with many of its remaining citizens.

"It was much better during Soviet times," Tonya Fominyh, 79, says. "Pensions were small but equal. We lived well. Now our pensions are nothing."

Mrs Fominyh receives 1,540 roubles a month from the state. She spent three decades working for the Soviet police force but now survives on handouts from her son.

So far few of Russia's petro-billions have found their way to society's poorest groups: pensioners, the unemployed and government employees, including teachers and hospital workers.

This month Russia's orthodox church warned that the gulf between the rich and poor was growing wider, with some 20% of Russians below the poverty line. There is still no real middle-class and there is a significant gap between urban and rural life, the church said, warning: "Russia possesses between 30% and 40% of the earth's resources. Revenues from exports of natural resources built the stabilisation fund. But only a very small part of society is getting richer. It is doing so at a pace that amazes even some of the richest people in the world. On the other hand, the majority of the population lives in destitution."

It is not only pensioners in villages who are hard up. Sitting in her tiny flat in urban Oryol, Tatiana Tsherbakova gazes at a giant photo of a sun-kissed beach pasted to her living room wall. It is the Canaries, one of many places Mrs Tsherbakova, 68, would like to visit. "I don't have the money to travel," she explains. "It's my great passion. I've always wanted to see Vladivostok. But the train ticket is too expensive."

This is one of the strange ironies of post-Soviet Russia. Thirty years ago Mrs Tsherbakova was not allowed to travel to the west, but she took advantage of cheap internal fares to roam across the Soviet Union, holidaying in Moldova, swimming in the Black Sea and hiking in the Kazakh mountains. Now she is free to travel anywhere, but on her state pension of 5,600 roubles a month she cannot afford to.

Kremlin economists say they face a dilemma. It is impossible to raise pensions significantly, they argue, without increasing inflation, currently running at 9%. They also point out that Russia's 38 million pensioners claim their pensions much earlier than western Europeans - at 55 for women and 60 for men.

"I don't believe this [argument about inflation] to be true," said Natalia Rimashevskaya, a poverty expert at Moscow's Institute of Social and Economic Studies of Population. "At the moment 30% of all salaries are below the minimum needed to live. Pensions are very low. The average is 2,500 roubles. This leaves pensioners on the edge. If prices go up, they fall into poverty."

At his annual press conference last month Mr Putin said that reducing social inequality would be one of his key tasks before he leaves office next year.

Average salaries have gone up significantly under Mr Putin. But the statistics conceal the fact that for millions, wages have hardly changed at all, Ms Rimashevskaya said. One of the biggest problems, she added, was the tax system, which saw oligarchs and road sweepers paying an identical tax rate of 13%.

In numbers

Estimated value of Russia's so-called stabilisation fund $103bn

The number of billionaires in Russia 53

Amount of foreign debt paid off $22bn

The average monthly pension £50

Proportion of salaries considered to be below the minimum needed to live 30%

guardian.co.uk © Guardian News and Media Limited 2008

[zeytuntsi]

Re: Is Russia a Banana Republic?

The situation is really sad.

http://www.cdi.org/russia/johnson/2007-215-8.cfm

Growing Gap Between Rich, Poor In Russia Does Not Promote Democracy - Judge

MOSCOW. Oct 12 (Interfax) - Growing stratification in Russia does not promote democracy, Chairman of the Russian Constitutional Court Valery Zorkin has said.

"When the discourse begins that we do not have the same standard of democracy as say in Antwerp or in the United States, one wishes to have the same standard. But unfortunately, nothing comes of it," he said at an international forum on the protection of constitutional and social rights in Moscow on Friday.

To prove his point he quoted statistics according to which the gap between the richest and poorest citizens of Russia is ten-fold and according to some sources forty-fold.

"One third of the population is poor," Zorkin said.

In addition, almost 14% of the population is at the bottom of society, Zorkin said. "According to the Russian Academy of Sciences, there are 4 million vagrants, 3 million beggars, 5 million street kids and 4.5 million prostitutes in Russia. If we add 5 million drug addicts and AIDS patients, we get 20-22 million people or about 13-14% of the population," he said.

In rural areas half of the population lives totally on the basis of a subsistence economy, Zorkin said.

"The present conditions encourage the solution of these problems through strong concentrated government. The result is a vicious circle of social inequality that can increase. The question arises - how to make government such that it would not spill beyond the framework of law," Zorkin said.

"These conditions call for the growing role of the international community and the legal environment of Europe based on the principles of democratic law-governed social state to which we belong," he said.

[zeytuntsi]

Re: Is Russia a Banana Republic?

Real scary!

http://findarticles.com/p/articles/mi_qa3757/is_200803/ai_n25139153

Public Experiences of Police Violence and Corruption in Contemporary Russia: A Case of Predatory Policing?

"Predatory policing" occurs where police officers mainly use their authority to advance their own material interests rather than to fight crime or protect the interests of elites. These practices have the potential to seriously compromise the public's trust in the police and other legal institutions, such as courts. Using data from six surveys and nine focus groups conducted in Russia, we address four empirical questions: (1) How widespread are public encounters with police violence and police corruption in Russia? (2) To what extent does exposure to these two forms of police misconduct vary by social and economic characteristics? (3) How do Russians perceive the police, the courts, and the use of violent methods by the police? (4) How, if at all, do experiences of police misconduct affect these perceptions? Our results suggest that Russia conforms to a model of predatory policing. Despite substantial differences in its law enforcement institutions and cultural norms regarding the law, Russia resembles the United States in that direct experiences of police abuse reduce confidence in the police and in the legal system more generally. The prevalence of predatory policing in Russia has undermined Russia's democratic transition, which should call attention to the indispensable role of the police and other public institutions in the success of democratic reforms.
More Articles of Interest

Social scientific studies of relations between the police, the state, and society have a long and rich tradition within the United States and the United Kingdom, and the last several decades have witnessed the growth of a comparative policing literature (Cain 1993; Bayley 1999; Mawby 1999; Caparini & Marenin 2004). We contribute to this literature by examining the prevalence, patterns, and consequences of public experiences of police violence and police corruption in contemporary Russia. Scholars, journalists, and nongovernmental organizations (NGOs) have suggested that police violence and corruption have become rampant in Russia since the collapse of the Soviet Union in late 1991. They have documented the forms that police misconduct takes, proposed explanations for why it has grown more frequent, and considered possible measures that might be taken to combat it. But these accounts rely largely on anecdotes, case studies, official data, localized investigations, and interviews rather than standard social science methods, and they do not derive broader theoretical insights from the Russian case. We seek to advance both empirical and theoretical understanding of police misconduct in Russia by analyzing data from six large sample surveys and from nine focus groups.

We address four empirical questions: (1) How widespread are public encounters with police violence and police corruption in Russia? (2) To what extent does exposure to these two forms of police misconduct vary by social and economic characteristics? (3) How do Russians perceive the police, the courts, and the use of violent methods by the police? (4) How, if at all, do experiences of police misconduct affect these perceptions? Given the quality of our data, our empirical findings provide a useful benchmark against which future social scientific studies of police misconduct in Russia can be measured.

Our empirical findings have three broader theoretical implications for social and political perspectives on police misconduct. Most important, the Russian pattern of police misconduct suggests a model of policing that has not been formally identified in the comparative policing literature: predatory policing. Policing can best be described as predatory where police activities are mainly (not to say exclusively) devoted to the personal enrichment and selfpreservation of the police themselves rather than the protection of the public or the systematic repression of subordinate groups. No police force in the world is completely free of corruption and violent abuse by officers in its ranks. Under predatory policing both forms of misconduct are not only widespread-the rule rather than the exception-but they are also motivated primarily by the interests of the police themselves, not the interests of other elites.

Second, by analyzing how police misconduct affects attitudes toward the police and the courts in Russia, we assess whether findings from United States-based research on these topics can be generalized to a very different national context. Russia differs from the United States in several key respects. Russia's police are more centralized and less accountable to the public. Some scholars argue that cultural traditions and Soviet-era experiences conspire to undermine perceptions of individual rights, belief in the rule of law, and trust in legal institutions. If so, low trust in the police could be based on long-standing cultural norms, not direct individual experiences of police misconduct. If individual encounters with police violence and corruption erode trust in legal institutions in Russia, despite Russia's distinctive cultural and institutional context, then U.S. patterns may be generalizable to other widely diverging institutional and cultural contexts.


Finally, the extent and effects of police misconduct in Russia draw our attention to the important but often neglected role of police reform in the process of democratic transition. With the exception of specialists on comparative policing, the vast majority of scholars analyzing transitions from authoritarian to democratic rule focus on reforms of political institutions, the economy, and legal institutions such as constitutions, courts, bodies of law, and judicial procedures. While changes in these realms are clearly integral to democratic transition, another essential condition for its success is that public institutions-especially those, such as the police, with access to the means of violence-serve rather than threaten the public. Our findings suggest that regardless of progress on other fronts, police misconduct undermines democracy in Russia. Scholarly theories of democratic transition should devote more attention to the role of the police and other public institutions. So should policy makers, because an undemocratic police force is a potential source of instability and an ineffective ally in the struggle against global organized crime and terrorist networks.

Before proceeding, we need to clarify what we mean by "public experiences of police violence and police corruption." We specifically refer to public experiences to highlight our focus on personal encounters with the police that members of the general public (including both citizens and noncitizens) identify as involving violence or corruption by the police officers and on the relationship between these encounters and broader public perceptions of the police and Russia's legal institutions. We define police violence as any act on the part of a police officer designed to inflict severe pain or suffering on the part of the victim, including beating with fists, feet, or instruments, and all forms of physical torture. Russian and international law generally prohibit such acts (Human Rights Watch 1999). Police corruption is a broad concept encompassing many behaviors and activities involving the illegal use of police authority for personal gain. However, our empirical analysis deals solely with corrupt activities that directly victimize individual members of the public: for example, bribe-seeking, extortion, shakedowns, and other activities whereby police officers use their authority to extract money, goods, or services from individuals. Because these corrupt actions always involve a victim in a very immediate sense, they can be studied using the methods and data at our disposal. Other forms of corruption such as collusion with criminals, kickbacks, coverups, and trafficking in contraband certainly wreak harm on the public, but they often take place completely outside of public view and therefore cannot be studied using general population surveys and focus groups.

Public experiences of police violence and corruption represent only one aspect of a complex phenomenon. A complete account of police misconduct would require analysis of a broader range of corrupt activities (not limited to those directly experienced by members of the general public), attempts to measure the actual prevalence of different forms of police misconduct, and examination of how the police organize, carry out, and perceive acts of violence and corruption in their ranks. But these topics are beyond the scope of our study. While public experiences are only one aspect of police misconduct, they can be readily studied using standard methods and, as we find, they matter a great deal: they undermine trust in the police and legal institutions and foster the widespread perception that the Russian police are not so much protectors of the public or of the state as they are predators on society.

Weitzer (1995: Ch. 1; see also Marenin 1985) describes two basic theoretical models of the role of the police. Policing in the United States and in most developed democracies conforms by and large to a "functionalist" model, where the police provide services, enforce the law, and preserve order in the general interest. Policing in authoritarian societies and those with polarized social structures tends to conform to a "divided society" model consistent with conflict theory: the police mainly protect the interest of dominant elites and suppress subordinate groups such as racial/ethnic minorities, the poor, or the political opposition. Of course, in any country frequent exceptions to the predominant model occur: police misconduct takes place where the functionalist model prevails, and the police occasionally solve crimes and arrest criminals where the divided society model prevails. The issue is: which model best typifies the performance of the police in a given national context? Among the distinctive characteristics of divided society policing are systematic bias of the police against subordinate groups, strong identification of the police with the ruling regime, and "polarized communal relations with the police, with the dominant group as a champion of the police and the subordinate group largely estranged from the police" (Weitzer 1995:5).

At first glance, the reportedly widespread police misconduct in Russia appears to conform to the divided society model. Since Russia became an independent state in late 1991, the police have suppressed real or perceived opposition and have persecuted ethnic minorities and immigrants (Shelley 1999; Robertson 2004). These types of actions have persisted in recent years (Amnesty International 2006; Radio Free Europe/Radio Liberty 2007). But we propose that Russia's police may correspond more closely to a third model: predatory policing.

Policing is best described as predatory to the extent that police officers prey on their society by using their positions to extract rents in the form of money, goods, or services from individual members of the public.1 They apply violence both as a direct means of extracting these rents and in order to satisfy occasional demands by officials to assist in oppressing opposition groups or to give the appearance of solving criminal cases, thereby preserving their access to opportunities for rent extraction. Predatory policing obviously departs from the functionalist model, where, with some exceptions, the police enforce the law and protect the public.2 But it also diverges from divided society policing in three key respects: (1) members of the public are just as or more likely to personally experience police corruption as they are to experience police violence; (2) all groups experience significant levels of police misconduct, even if some groups are disproportionately exposed; and (3) even if elites occasionally deploy the police for political purposes, most instances of police misconduct advance the material interests and self-preservation of the police themselves rather than suppress subordinate groups.

For more see http://findarticles.com/p/articles/m...g=content;col1