Exodus of capital hits Russia lending

An exodus of foreign capital is forcing Russian banks to slash lending as the international reaction to the country’s military stand-off with Georgia starts to affect the real economy.

Bankers say Russia is facing its worst crisis since the August 1998 default. The Russian stock market has plummeted more than 40 per cent since May.

A flight of capital estimated by analysts at up to $20bn (€14bn, £11bn) since the start of the conflict is drying up liquidity. The Russian Trading System index fell another 7.5 per cent yesterday to its lowest level since June 2006.

Bankers and analysts said real estate and retail businesses were being hardest hit by a slowdown in lending.

“There are real estate developers who can’t finish projects. They can’t get money from anyone, state banks included,” said one senior banker in Moscow speaking on condition of anonymity.

“No one was ready for the lack of cash to manifest itself so quickly,” he said. “Nobody has any money. The country has got all this cash but the banking system and capital markets are not particularly good at allocating it. There is a flood of liquidity in the state’s fields and a drought in the private sector.”

Russia’s central bank says analysts’ estimates of capital flight are exaggerated and only $5bn left the country in August. But foreign investors have shunned the Russian rouble and stock market.

The conflict with Georgia was the final straw in a summer punctuated by ill omens such as Vladimir Putin’s attack on Mechel, the Russian steelmaker, which reminded investors of the political risks of investing in Russia.

Domestic borrowing costs for Russian companies have soared because of greater refinancing risks.

Exacerbating Russia’s market fall is the fact that many of the country’s leading tycoons raised funds for expansion by pledging shares in some of the nation’s biggest companies. Now they are facing margin calls from the banks that lent money against the shares, bankers and traders say. That is making the market sell-off worse as businesses fail to find alternative sources of funds.

“All the oligarchs that are over-leveraged are being forced to sell off,” said Sergei Sidorov, head of capital markets at Unicredit in Moscow.

Hans-Jörg Rudloff, chairman of Barclays Capital, said the military standoff between Moscow and Tbilisi had exacerbated fraught nerves in the global investment community, and the steep decline in Russian stock prices could have a big impact on the ability of Russian private companies to fund further growth. “This is a huge setback for globalisation and it will without doubt increase country risk premiums not just for Russia but for everywhere.”

Calling on the west not to shun Russia, he said: “Geopolitical tensions always interfere with economic planning and could derail growth patterns around the world.”

Pyotr Aven, president of one of Russia’s biggest private banks, Alfa Bank, told a Reuters investment summit yesterday that the economy was showing “dangerous” signs of slowing amid accelerating inflation and a slowdown in real income growth.

Chris Weafer, chief strategist at Uralsib investment bank in Moscow, said investors were spooked by Russia’s slowing economy, question marks over Russian companies’ earnings potential after Mr Putin’s broadside at Mechel, increasing economic dependence on oil, and potential damage to Russia’s ability to attract foreign investment.

The Russian government has until now helped shore up liquidity despite the global credit squeeze by placing up to $12.75bn development funds in short-term deposits in the banking system and holding regular cash auctions.

In a sign of the growing squeeze, however, Russian banks submitted bids for $3.5bn at a cash auction on Monday, while the finance ministry made only $2.4bn available.

Cash held by banks on deposit at the central bank has been falling day by the day, reaching a low of Rbs638.4bn ($25bn, €18bn, £14bn) yesterday from Rbs675.6bn the day before.

Even state banks such as Sberbank, the retail institution, could face difficulties raising capital abroad in the wake of the Georgian conflict, bankers and analysts said. Sberbank is currently seeking a $1bn-plus syndicated loan on international markets.

Alexei Kudrin, the Russian finance minister, yesterday attempted to limit the damage. Speaking at the Reuters investment forum, he said the conflict with Georgia had reduced Russia’s political risk by eliminating the potential for further military escalation, while the recent resolution of the dispute over TNK-BP, the Anglo-Russian energy venture, was a sign that Russia was trying to improve its investment climate.

But bankers are unconvinced. One banker, however, said: “Investors are . . . likely to ignore Russia. Companies are not going to be able to issue on international markets.”

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