Russia’s Master Plan Muddle
Russian shares struggled to stay positive on anemic 1.5 percent GDP growth and the closure of 75th ranked Master Bank for alleged money laundering and other infractions resulting in a $900 million deposit insurance payout. A cousin of President Putin was associated with the institution and its accounts were transferred to state giant Sberbank after the central bank warned of “overheating” in consumer loans which jumped 35 percent through the third quarter. Sberbank’s CEO also cited a “bubble” in slashing housing credit approvals and raising provisions as it prepares $1.5 billion in medium-term subordinated debt issuance to meet Basel III standards. With 6 percent inflation, price freezes were imposed for energy and transport to also boost government monopoly efficiency, as competitive scenarios underscore indefinite stagflation from oil export and structural reform drift. The current account surplus is projected at only 1 percent of GDP through mid-decade and continues to be offset by capital flight estimated at over $50 billion this year. The ruble has continued to soften toward the automatic intervention zone as interest rates remain on hold with the economy expecting an early 2014 boost from the Sochi Winter Olympics and additional infrastructure projects. Along with petroleum other commodity producers are suffering from cycle reversals as steelmaker Severstal restructures debt and potash firms are caught in a cross-border business and legal struggles. The regional fallout has exacerbated tension with the EU over partnership for CIS members, as Georgia went ahead with a deal at the November summit in Lithuania while Ukraine refused at the final hour provoking large demonstrations in Kiev against Moscow’s influence. Officials partially blamed IMF resistance to renewing a standby arrangement for the turnaround with over $10 billion in external repayment due by end-2014, and reserves already down one-third to $20 billion in October to defend the 8 to the dollar currency peg and cover the 9 percent of GDP current account gap.
The Kremlin may offer gas import and bilateral loan relief but sovereign ratings downgrades are set to continue into the pre-2015 presidential election period as recession and fiscal weakness persist. Foreign investors have shunned both debt and equity with devaluation widely foreseen and President Yanukovych trying to maintain his grip by keeping opposition head Tymoshenko in jail and harassing the party of former boxing champion Klitschko which is close in opinion surveys. Amid the continental rivalry China has surfaced in credit for natural resources and US gas producers have signed facilities. Agriculture has begun to suffer from heavy rains and inflation may again rise to 5 percent next year on food and depreciation pressures. In contrast both prices and the budget deficit were on target in host Lithuania for euro adoption with GDP growth also strong at 3.5 percent. Exports to core Europe and Baltic neighbors were up 10 percent through September following partial mastery of post-crisis internal adjustments.
