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from the state-bank-needs-cash-infusion dept.
Bloomberg reports that a state bank used to pay for "special projects" in Russia may require an $18 billion bailout due to the effects of sanctions and low oil prices:
For years, Vladimir Putin used Vnesheconombank (VEB) to pay for "special projects," from the Sochi Olympics to covert acquisitions in Ukraine to oligarch bailouts. Now, the state bank needs a rescue of its own and it could be the Kremlin's costliest yet. VEB was supposed to be the financial supercharger of the Russian president's state-directed capitalism, using its government backing to raise billions at low rates on western markets and pumping them into ventures the Kremlin wanted funded, some concealed from public view with code names like "Lily of the Valley."
Hit by Western sanctions last year, VEB has stopped new lending. The cost of its bailout could reach 1.3 trillion rubles ($18 billion), according to several senior government officials, ballooning the budget deficit at a time when plunging oil prices are forcing spending cuts. "The government can't just leave it alone to face the problems caused by the financial and economic situation in the country, speaking directly, by various kinds of sanction pressures," Prime Minister Dmitry Medvedev told a VEB board meeting discussing rescue options on Dec. 22.
The Finance Ministry has submitted proposals to aid VEB in 2016 to the government for approval, with some measures ready to be carried out in the first quarter, Svetlana Nikitina, an aide to the finance minister, said in Moscow on Tuesday. The plan provides for boosting capital to ensure the bank's ability to pay creditors, as well as supporting liquidity and cleaning up assets, she said.
Over the past eight years, VEB came to epitomize Putin's hybrid system that combined elements of market financing with tight Kremlin control, funding billions in industrial and infrastructure projects back in the days when oil prices were high and foreign credit was easy.
But U.S. and EU sanctions imposed in 2014 over the Ukraine crisis cut off VEB's access to international financial markets, leaving it without a source of cheap funding and facing as much as $16 billion in foreign-currency debt just as the ruble began its plunge. At the same time, falling oil prices accelerated Russia's slide into recession, pushing many of VEB's projects deeper into the red.
(Score: 3, Insightful) by bootsy on Wednesday December 30 2015, @05:34PM
It looks like Russia will join Europe ( especially Portugal but also the UK ) in artificially propping up its banks at the expense of its own citizens.
It's not so much sanctions that have hit Russia as the collapse in commodities prices. They get so much less for their gas and oil now. It's even starting to have an impact on Saudia Arabia.
US Sanctions don't stop China buying fuel from Russia. They have access to markets but the value of their product has dropped considerably. US fraking may have had more of an impact flooding the market.
In the UK we have pumped lots of money into banks, lent money to them at crazily low interest rates and forced up the price of houses so their stupidly exposed property heavy balance sheets look like they are solvent. Banks have ceased to lend to businesses and they are still all far too big to fail.
It is almost impossible to save now as the interest rates are not as high after tax as inflation. Banks are starting to look like a very bad deal for savers and it is only the fact that the area is so highly regulated ( fixed ) that other players cannot come in and disrupt it. As a business looking to grow banks in the UK are useless. Kickstarter type methods seems to be the only way to grow a small business now. In the UK Banks just want to lend against houses ( especially for buy to let ) as they can pull back the property quickly and kick out tenants easily. An owner occupier has some protection but a rental tenant has none. Did I mention how house prices are being kept artificially high?
(Score: 2, Touché) by Unixnut on Wednesday December 30 2015, @05:56PM
the problem is, too many people have their life savings invested in housing, because nothing else provides a good return, just like you mentioned. A house will give you a 2-3% yield as a rental, but that does include the increase in the price of the asset (usually due to the decrease in worth of the GBP).
Considering that a savings account might give you 1-2%, which is taxed to the point that it is barely worth investing, it is not surprising that people put their savings into houses.
Problem is that it is a self perpetuating cycle. People put money in houses, which ups the demand for housing, which makes the government force banks to offer more and/or larger mortgages to buyers, which increases the market price of a house, which brings 10% ROI to people, who then see this and put their money in houses.
It is really like a big Ponzi, where the cycle can continue until the price becomes to high for anyone to buy. This doesn't happen because the government keeps printing money, people keep going into more and more debt to buy houses, and there is a large contingent of rich people with money from questionable sources that need a way of laundering it. The (London) housing market is very good for that.
Not to mention, if house prices fall, only the desperate will sell, because nobody will want to sell at a loss, especially if they end up in negative equity because of it. So the system is kind of self balancing. Until people go bankrupt and assets are seized and auctioned off , I suspect the housing market will either grow slowly, or grow quickly, but not shrink any appreciable amount. Too much is invested by all involved, including the government (who gets stamp duty on the property, so the higher it is, the more for them).
And yes, banks are a very bad deal right now, especially in the EU, which is another reason people are putting their money anywhere but banks, including houses, classic cars, artwork and the stock market. Hence the aforementioned have increased in price faster than inflation.
(Score: 0) by Anonymous Coward on Wednesday December 30 2015, @06:45PM
This is currently true, but real estate have a brutal wake up with demographics changes. The baby boomers are starting to die, and if their kids aren't interested in the property will sell even if below "market average". Why do they care, any money is more money to them. Currently speculative buying can fill in those cracks (especially with low interest rates), but it seems likely there will be a downward spiral unless we can find a reason to justify more houses than people. Although with the collapse of traditional marriage, perhaps more houses will be needed in the near future as men and women live separately.
(Score: 0) by Anonymous Coward on Wednesday December 30 2015, @07:11PM
Not really sure how the "collapse of traditional marriage" applies here. TFA is about Russia, which still heavily favors traditional marriage. Remember the GLBT protests [wikipedia.org] surrounding the 2014 Olympic games in Sochi?
And even if the fall of traditional marriage had an impact on housing demand in a place like the US, I would think it would result in a decrease in housing demand due to more gay or lesbian couples living together instead of by themselves. Do you really think more gay people who previously would have hid in a traditional mariage would choose to live alone rather than in a gay marrage with someone under the same roof?
(Score: 1, Informative) by Anonymous Coward on Wednesday December 30 2015, @08:02PM
Its weird you went off on the gay tangent when the GP was clearly talking about people choosing to not get married.
Perhaps your gaydar needs a squelch adjustment?
(Score: 2) by isostatic on Thursday December 31 2015, @01:37AM
The change of the traditional family (2 adults, 2.4 kids, 1 house, 1 worker) into 2 workers has driven house prices up. People spend x% of their income on houses, it used to be £30k a year income, so say £1k a month. It's now £60k a year, giving £3k a month that can be spent (although some of that goes to child care, hence government subsidising childcare and encouraging outsourcing child upbringing)
Sucks if you're a single parent, or if you want to bring up kids in the traditional way.
(Score: 4, Insightful) by Dunbal on Wednesday December 30 2015, @09:00PM
Portugal's debt to GDP ratio: 129%
UK's debt to GDP ratio: 90.6%
Russia's debt to GDP ratio: 17%.
And this was modded "insightful". Don't worry, Russia can afford the bailout and plenty more before turning into Portugal or the UK...
(Score: 1) by khallow on Thursday December 31 2015, @04:47AM
Don't worry, Russia can afford the bailout and plenty more before turning into Portugal or the UK...
Unless their Ruble gets devalued further. A lot of Russian debt is in foreign currency denomination. That means that their debt levels are highly dependent on them not inflating their currency. Printing Rubles to pay off bad state bank debt can cause inflation of the Ruble which can greatly change that debt to GDP ratio.
(Score: 2) by frojack on Thursday December 31 2015, @08:28AM
A lot of Russian debt is in foreign currency denomination. That means that their debt levels are highly dependent on them not inflating their currency.
Wait, that's not the position Russia is in.
If you have to pay in Pounds Sterling, it really doesn't matter if you inflate your own currency, as long as you sell your oil payable in Pounds Sterling, (something reliable and stable relative to the pound).
When you have exports, your internal currency is not so critical, and printing money lets you retire internal debts cheaply.
No, you are mistaken. I've always had this sig.
(Score: 1) by khallow on Thursday December 31 2015, @03:18PM
Wait, that's not the position Russia is in.
Except that yes, they are in that position. They defaulted on their debt in 1998. Their debt to foreign lenders won't be in rubles.
If you have to pay in Pounds Sterling, it really doesn't matter if you inflate your own currency, as long as you sell your oil payable in Pounds Sterling, (something reliable and stable relative to the pound).
If you do that, then you just went from 17% of GDP to well over 100% of annual oil revenue (this link has Russian "oil rent" [worldbank.org] at roughly 13% of GDP in 2013.
(Score: 2) by frojack on Thursday December 31 2015, @06:40PM
Oh, the horror, a book keeping penalty!!
But you did prove my main point when you said:
. Their debt to foreign lenders won't be in rubles.
That means, as I stated, that their payments in foreign currencies are already dis-joined from the the ruble. You stated that this allows the debt to appear as a greater percent of GDP. My point is that they don't care, and needn't care.
As long as they have the foreign currency, it really doesn't matter how low the ruble goes, or how high the debt goes relative to GDP in rubles.
Because your debt is no longer measured against GDP but rather against your foreign receipts.
(Which is a good thing for them, because in theory, the ruble floats relative to foreign currencies, (since early 2014), but it is allowed to do so only within a very narrow range. Then the stat bank steps in an refuses to allow further float.)
This might matter in a totally floating currency. But that's not the case.
Which is ultimately why Putin is bulldozing foreign cheese and forbidding huge quantities of imports, first of food, then clothing, then cars, and a whole host of things. He's trying to shore up his balance of payments.
No, you are mistaken. I've always had this sig.
(Score: 1) by khallow on Thursday December 31 2015, @09:50PM
That means, as I stated, that their payments in foreign currencies are already dis-joined from the the ruble. You stated that this allows the debt to appear as a greater percent of GDP. My point is that they don't care, and needn't care.
As long as they have the foreign currency, it really doesn't matter how low the ruble goes, or how high the debt goes relative to GDP in rubles.
"As long as". When that is no longer the case, such as when the debt is large relative to the means of getting that foreign currency and they suddenly find their ability to trade in foreign currency significantly impaired (such as due to trade sanctions for the invasion of Ukraine), then it indeed becomes a huge problem for Russia.
Because your debt is no longer measured against GDP but rather against your foreign receipts.
I think you missed the part of my post where their foreign receipts are just not that large relative to their debt.
Which is ultimately why Putin is bulldozing foreign cheese and forbidding huge quantities of imports, first of food, then clothing, then cars, and a whole host of things. He's trying to shore up his balance of payments.
As canny as a drowning man. I don't see such desperation as support for your argument.
(Score: 2) by Gravis on Wednesday December 30 2015, @09:37PM
$18 billion is a lot of money... it's just not a lot of money for governments. the US bailouts totaled over a trillion and still caused a huge economic impact that was felt globally. $18 billion? pff... get off my lawn!
(Score: 0) by Anonymous Coward on Thursday December 31 2015, @12:00AM
It's possible letting them fail could have triggered even bigger problems. Many analysts suggest it could have triggered a domino effect, putting us into Hoover territory of 25% unemployment. The relative size of the initial financial problem is comparable to 1929's. We are lucky to come out as well as we did. Fate was giving us the evil eye.
Note that some of the "bailout" money was in the form of loans, not a simple handout.
(Score: 1) by segwonk on Thursday December 31 2015, @09:49PM
18 billion dollars? That's it? That's like a rounding error in American government budgets....
.......go til ya know.