Coming Next: Russian Domestic Credit Crunch and Liquidity Crisis
The market shock resulting from the precipitous decline of the ruble at the beginning of this week has accelerated the flight of Western banks, securities firms and several large companies from Russian risk exposure. It is already possible to detect the seizing of the gears of the Russian credit markets, notably the 3‑month interbank deposit rate rising to about 28% (an unsustainable level). This indicator (and others like it) is emblematic of the panicked effort to attract and maintain the bank deposits of Russian citizens as well as those of Western hard-currency players.
Despite some stabilization of the ruble (at this writing around 60 to the dollar), Western banks are using this likely temporary hiatus to quicken the pace (albeit quietly) of their “risk exposure reduction” strategies. The smart money apparently senses a domestic liquidity and banking crisis being the next tidal wave of Russian economic and financial (E&F) turmoil.
Many Western companies have halted sales in Russia, grain exporters are facing new restrictions to prevent shortages (pushing up domestic wheat prices), Belarus (a Moscow acolyte) is now demanding payment in hard currency for imported Belarusian goods, the pool of usable collateral for loans in Russia is shrinking rapidly, domestic banks are cutting or reducing credit lines and syndicated loan volumes have contracted to a mere 14% of their 2013 total.
Those Western banks with substantial Russian credit exposure — particularly Austria’s Raiffeisen, Italy’s Unicredit and France’s Societe Generale — are witnessing significant hits to their share values in Western markets. As for Russian banks, Sberbank’s stock has lost 18% of its value and VTB 14% in the last two weeks. Major bank recapitalization requirements are now a near certainty, putting additional pressure on Russian hard currency reserves.
In short, these types of indicators are multiplying, leading to an expanding market perception of a slow-motion (but accelerating) Russian E&F train wreck in-the-making. Western and domestic credit lubricates Moscow’s brittle, undiversified economy. When this financial oil leaks from the economic engine, the latter eventually seizes, laying the groundwork for widespread social unrest and spasms of belligerent blame directed at the West.