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PUTIN'S UKRAINE GAMBIT HURTS ECONOMY AS ALLIES LOSE BILLIONS
Today's Zaman, Turkey
March 6 2014
6 March 2014 /AGNES LOVASZ, BLOOMBERG NEWS
LONDON -- President Vladimir Putin's brinkmanship in Ukraine has
already cost some of his closest comrades billions of dollars. The
other 144 million Russians may also pay a price.
Putin's troop buildup in Crimea triggered the biggest stock selloff
in five years on March 3. It also pulled the ruble to a record low,
prompting the central bank to raise interest rates the most since 1998,
when a cash-strapped government stumbled toward default.
Longtime Putin ally Gennady Timchenko and his partner Leonid Mikhelson
lost a combined $3.2 billion of their wealth after their gas producer
OAO Novatek tumbled 18 percent.
"Russia will be the big loser of the crisis in Ukraine," said Timothy
Ash, chief emerging-market economist at Standard Bank Group in London.
"There'll be a big hit to domestic and foreign confidence, less
investment and likely increased outflows, likely losses for Russian
banks with exposure in Ukraine, a weaker ruble and weaker growth
and recovery."
The tensest standoff with the West since the end of the Cold War
is exposing the weakness of an economy rebuilt on the back of the
energy industry. With oil and gas accounting for more than half of
all exports and energy prices stagnant, the growth potential is all
but exhausted, prompting officials in Moscow to sound the recession
alarm even as the country's main trading partners recover.
Russia needs a new, more diversified economic model to secure future
expansion, Antonio Spilimbergo, the International Monetary Fund's
mission chief in Moscow, said in a report last month. The $2 trillion
economy decelerated for a fourth year in 2013 as consumer spending
weakened and investment sagged along with demand for energy. Growth
slowed to 1.3 percent last year, the least since a 2009 recession,
from 3.4 percent in 2012.
Putin is seeking to regain influence over Ukraine after the overthrow
of Kremlin-backed President Viktor Yanukovych, who was deposed by
lawmakers on Feb. 22 after clashes with protesters in Kiev left at
least 95 people dead. Ignoring warnings from the United States and the
European Union, Putin has since sent thousands of troops to augment
the 15,000 already in Crimea, where Russia has stationed the Black
Sea Fleet since its founding by Catherine the Great in 1783.
The crisis has helped fuel the ruble's 9 percent slide this year
against the dollar, the most among 24 emerging-market currencies
tracked by Bloomberg after Argentina's peso. The Russian currency
weakened 1.8 percent against the dollar March 3 even after the central
bank unexpectedly raised its key interest rate by 150 basis points
and spent as much as $12 billion defending the currency, according
to ING Groep. The Micex Index sank as much as 13 percent.
Putin's gambit is already threatening to derail $8 billion of
international loans sought by at least 10 Russian companies including
billionaire Mikhail Fridman's VimpelCom Ltd., according to data
compiled by Bloomberg. Secretary of State John Kerry threatened to
kick Russia out of the Group of Eight and impose asset freezes and
travel bans on Kremlin officials. That may force bankers to re-evaluate
potential deals, according to UralSib Capital in Moscow.
The Micex Index fell 0.4 percent Wednesday, with Novatek sliding
0.3 percent. The benchmark surged 5.3 percent Tuesday after Putin
said he doesn't have plans to annex Crimea. The ruble was unchanged
at 9:46 p.m. in Moscow after a rebound Tuesday. Even so, the damage
inflicted on investor sentiment will be felt for months if not longer,
said Lilit Gevorgyan, senior economist at IHS Global Insight in London.
The capital flight echoes the aftermath of Putin's last military foray
into a fellow former Soviet republic, Georgia, in August 2008 and
the collapse of Lehman Brothers the following month. In the aftermath
of those events through Feruary 2009, investors pulled at least $290
billion out of the country, according to BNP Paribas estimates. That
war, over two Russia-backed breakaway regions, also helped wipe $230
billion off the combined wealth of Russia's 25 richest men over a
five-month period, according to Bloomberg calculations.
Even before the protests in Kiev turned deadly last month, Deputy
Economy Minister Andrei Klepach said capital outflows were increasing
and may reach $35 billion in the first quarter, more than half of
the $63 billion for all of 2013.
The military threat in Crimea can be added to the list of reasons
behind the capital exodus, which includes corruption, red tape and a
feeble legal system, Ash of Standard Bank said. Russia is the world's
most corrupt major economy, ranking alongside Pakistan and Nicaragua
at 127th of 176 nations in the annual Corruption Perceptions Index
compiled by Transparency International, a Berlin-based watchdog.
"The loss of face that's been suffered in the past week or so is
arguably the biggest humiliation that Putin has faced and Russia is
not used to losing these battles on its doorstep," Neil Shearing,
chief emerging-markets economist at Capital Economics Ltd., said by
phone from London. "Even though the events in Ukraine are shaped
by politics rather than economics, there's potential for economic
fallout for Russia."
In November, when Putin scuttled Ukraine's planned free trade deal with
the EU by offering Yanukovych $15 billion of aid and cheaper gas, he
said Russian banks had $28 billion of loans and assets in the country.
Souring loans may "materially affect the solvency" of Russian banks
with "significant" assets in Ukraine, Fitch Ratings said Feb. 25,
adding that state-owned lenders can count on government funding if
needed. The banks with the biggest exposure are Vnesheconombank,
the development bank known as VEB, with 74 percent of its capital,
Gazprombank with about 40 percent and VTB Group with 14 percent,
according to Fitch.
Russian companies also have investments in Ukraine's energy, defense
and agricultural industries. The country is Russia's fifth-largest
trading partner, with turnover of $39.6 billion last year, according
to data from the Federal Customs Service in Moscow. Exports to Ukraine
were $23.8 billion, while imports totaled $15.8 billion.
More vital to Putin is Ukraine's network of pipelines, through which
state-run OAO Gazprom sends more than half of its exports to Europe,
where it has a quarter of the market.
Even so, Putin is prepared to do whatever it takes to stop Ukraine
from aligning with the West, said Michael Ganske, head of emerging
markets at Rogge Global Partners Plc in London.
Putin considers Ukraine and its 45 million people key to his goal
of building a trading bloc to rival the EU, according to Ganske. His
customs union, which Yanukovych planned closer ties with, is currently
comprised of Russia, Belarus and Kazakhstan, though Armenia has also
agreed to join.
"Putin cares for the economy, but he cares more for the greatness of
Russia and regional influence," Ganske said. "As a former spy, Putin
has this grand-Russia idea in his head and he just doesn't accept that
Russia's importance in the geopolitical context has decreased. Putin
doesn't like the idea of Ukraine moving further away from Russia and
becoming part of the EU at some stage, let alone NATO."
With assistance from Olga Tanas, Anna Andrianova, Vladimir Kuznetsov
and Scott Rose in Moscow and Stephen Morris in London.
http://www.todayszaman.com/news-341287-putins-ukraine-gambit-hurts-economy-as-allies-lose-billions.html
Today's Zaman, Turkey
March 6 2014
6 March 2014 /AGNES LOVASZ, BLOOMBERG NEWS
LONDON -- President Vladimir Putin's brinkmanship in Ukraine has
already cost some of his closest comrades billions of dollars. The
other 144 million Russians may also pay a price.
Putin's troop buildup in Crimea triggered the biggest stock selloff
in five years on March 3. It also pulled the ruble to a record low,
prompting the central bank to raise interest rates the most since 1998,
when a cash-strapped government stumbled toward default.
Longtime Putin ally Gennady Timchenko and his partner Leonid Mikhelson
lost a combined $3.2 billion of their wealth after their gas producer
OAO Novatek tumbled 18 percent.
"Russia will be the big loser of the crisis in Ukraine," said Timothy
Ash, chief emerging-market economist at Standard Bank Group in London.
"There'll be a big hit to domestic and foreign confidence, less
investment and likely increased outflows, likely losses for Russian
banks with exposure in Ukraine, a weaker ruble and weaker growth
and recovery."
The tensest standoff with the West since the end of the Cold War
is exposing the weakness of an economy rebuilt on the back of the
energy industry. With oil and gas accounting for more than half of
all exports and energy prices stagnant, the growth potential is all
but exhausted, prompting officials in Moscow to sound the recession
alarm even as the country's main trading partners recover.
Russia needs a new, more diversified economic model to secure future
expansion, Antonio Spilimbergo, the International Monetary Fund's
mission chief in Moscow, said in a report last month. The $2 trillion
economy decelerated for a fourth year in 2013 as consumer spending
weakened and investment sagged along with demand for energy. Growth
slowed to 1.3 percent last year, the least since a 2009 recession,
from 3.4 percent in 2012.
Putin is seeking to regain influence over Ukraine after the overthrow
of Kremlin-backed President Viktor Yanukovych, who was deposed by
lawmakers on Feb. 22 after clashes with protesters in Kiev left at
least 95 people dead. Ignoring warnings from the United States and the
European Union, Putin has since sent thousands of troops to augment
the 15,000 already in Crimea, where Russia has stationed the Black
Sea Fleet since its founding by Catherine the Great in 1783.
The crisis has helped fuel the ruble's 9 percent slide this year
against the dollar, the most among 24 emerging-market currencies
tracked by Bloomberg after Argentina's peso. The Russian currency
weakened 1.8 percent against the dollar March 3 even after the central
bank unexpectedly raised its key interest rate by 150 basis points
and spent as much as $12 billion defending the currency, according
to ING Groep. The Micex Index sank as much as 13 percent.
Putin's gambit is already threatening to derail $8 billion of
international loans sought by at least 10 Russian companies including
billionaire Mikhail Fridman's VimpelCom Ltd., according to data
compiled by Bloomberg. Secretary of State John Kerry threatened to
kick Russia out of the Group of Eight and impose asset freezes and
travel bans on Kremlin officials. That may force bankers to re-evaluate
potential deals, according to UralSib Capital in Moscow.
The Micex Index fell 0.4 percent Wednesday, with Novatek sliding
0.3 percent. The benchmark surged 5.3 percent Tuesday after Putin
said he doesn't have plans to annex Crimea. The ruble was unchanged
at 9:46 p.m. in Moscow after a rebound Tuesday. Even so, the damage
inflicted on investor sentiment will be felt for months if not longer,
said Lilit Gevorgyan, senior economist at IHS Global Insight in London.
The capital flight echoes the aftermath of Putin's last military foray
into a fellow former Soviet republic, Georgia, in August 2008 and
the collapse of Lehman Brothers the following month. In the aftermath
of those events through Feruary 2009, investors pulled at least $290
billion out of the country, according to BNP Paribas estimates. That
war, over two Russia-backed breakaway regions, also helped wipe $230
billion off the combined wealth of Russia's 25 richest men over a
five-month period, according to Bloomberg calculations.
Even before the protests in Kiev turned deadly last month, Deputy
Economy Minister Andrei Klepach said capital outflows were increasing
and may reach $35 billion in the first quarter, more than half of
the $63 billion for all of 2013.
The military threat in Crimea can be added to the list of reasons
behind the capital exodus, which includes corruption, red tape and a
feeble legal system, Ash of Standard Bank said. Russia is the world's
most corrupt major economy, ranking alongside Pakistan and Nicaragua
at 127th of 176 nations in the annual Corruption Perceptions Index
compiled by Transparency International, a Berlin-based watchdog.
"The loss of face that's been suffered in the past week or so is
arguably the biggest humiliation that Putin has faced and Russia is
not used to losing these battles on its doorstep," Neil Shearing,
chief emerging-markets economist at Capital Economics Ltd., said by
phone from London. "Even though the events in Ukraine are shaped
by politics rather than economics, there's potential for economic
fallout for Russia."
In November, when Putin scuttled Ukraine's planned free trade deal with
the EU by offering Yanukovych $15 billion of aid and cheaper gas, he
said Russian banks had $28 billion of loans and assets in the country.
Souring loans may "materially affect the solvency" of Russian banks
with "significant" assets in Ukraine, Fitch Ratings said Feb. 25,
adding that state-owned lenders can count on government funding if
needed. The banks with the biggest exposure are Vnesheconombank,
the development bank known as VEB, with 74 percent of its capital,
Gazprombank with about 40 percent and VTB Group with 14 percent,
according to Fitch.
Russian companies also have investments in Ukraine's energy, defense
and agricultural industries. The country is Russia's fifth-largest
trading partner, with turnover of $39.6 billion last year, according
to data from the Federal Customs Service in Moscow. Exports to Ukraine
were $23.8 billion, while imports totaled $15.8 billion.
More vital to Putin is Ukraine's network of pipelines, through which
state-run OAO Gazprom sends more than half of its exports to Europe,
where it has a quarter of the market.
Even so, Putin is prepared to do whatever it takes to stop Ukraine
from aligning with the West, said Michael Ganske, head of emerging
markets at Rogge Global Partners Plc in London.
Putin considers Ukraine and its 45 million people key to his goal
of building a trading bloc to rival the EU, according to Ganske. His
customs union, which Yanukovych planned closer ties with, is currently
comprised of Russia, Belarus and Kazakhstan, though Armenia has also
agreed to join.
"Putin cares for the economy, but he cares more for the greatness of
Russia and regional influence," Ganske said. "As a former spy, Putin
has this grand-Russia idea in his head and he just doesn't accept that
Russia's importance in the geopolitical context has decreased. Putin
doesn't like the idea of Ukraine moving further away from Russia and
becoming part of the EU at some stage, let alone NATO."
With assistance from Olga Tanas, Anna Andrianova, Vladimir Kuznetsov
and Scott Rose in Moscow and Stephen Morris in London.
http://www.todayszaman.com/news-341287-putins-ukraine-gambit-hurts-economy-as-allies-lose-billions.html