Heard on NPR today that, after the 2 days scare and non-response by the EU
or the US, Russian stock market has regained 50% of its losses and is still
a good deal as its stocks are priced very low due to shaky economy. Outlook
was that Putin's folly will have little bearing on capitalist greed.
----- Original Message -----
From: <[email protected]>
To: <[email protected]>
Sent: Wednesday, March 19, 2014 7:11 PM
Subject: [politics] Crimea will cost Russia at least $400bn this year
>
>
>
> The real economic cost for Russia invading Crimea before sanctions.
>
>
> Crimea will cost Russia at least $400bn this year
> http://www.bne.eu/story5875
> Ben Aris in Moscow
> March 18, 2014
>
> The West is threatening further sanctions should Russia proceed with the
> formal annexation of Crimea. There is no need. The crisis has already cost
> Russia $187bn so far and almost certainly wrecked any chance of economic
> growth this year. And the impact of the crisis could do roughly $440bn
> worth of damage over the whole year -- and that is before the West
> inflicts a single cent's worth of sanctions, according to bne's (very
> rough) estimates.
>
> Russian President Vladimir Putin's decision to send in the army to Crimea
> is a massive own goal as far as Russia's economy is concerned. This was
> the year Russia was supposed to emerge from the aftermath of the 2008
> crisis and grow by up to 3.5%. However, it was obvious even before the
> first squaddie climbed into a truck that intervening in Ukraine militarily
> was going to not only cost a lot of money, but also do enormous economic
> damage to the already fragile investment climate.
>
> "Regardless of the West's response to the Crimean crisis, the economic
> damage to Russia will be vast. First, there are the direct costs of
> military operations and of supporting the Crimean regime and its woefully
> inefficient economy (which has been heavily subsidized by Ukraine's
> government for years)," exiled Russian economist Sergei Guriev said in a
> recent article.
>
> In this piece, bne attempts to tot up some of the costs already incurred
> by the Crimean crisis and guestimate costs that will be incurred over the
> rest of the year. While a lot of the estimates are wide open to debate, it
> is still clear that Russia has inflicted more economic damage on itself
> than the West could ever hope to achieve with Iran-style punitive
> sanctions.
>
> The cost so far
>
> As Russian troops appeared on the streets of eastern Europe's favourite
> holiday resort in February, Russia's stock market tanked, losing 15% in a
> day and wiping an estimated $55bn off the market capitalization at the
> shaky stroke of a pen. While most pundits were expecting Russia to cancel
> its $15bn bailout deal for Ukraine and possibly some economic retaliation
> after the Maidan government took over in Kyiv, no one was expecting the
> display of force.
>
> Running total: $55bn
>
> Equity investors were already unsettled by emerging market uncertainties,
> with $130m leaving in the week before the Crimean crisis alone, according
> to Emerging Market Value Portfolio. But redemptions have probably since
> accelerated: Let's call it a round $1bn for the whole year to date of
> redemptions from funds.
>
> Running total: $56bn
>
> The same collywobbles will also have accelerated capital flight, which the
> Central Bank of Russia (CBR) was hoping would slow this year. An estimated
> $17bn left the country in January according to the authorities -- the same
> amount as that month a year ago -- but Renaissance Capital's chief
> economist, Charles Robinson, estimates $50bn has already left in the first
> quarter of this year.
>
> Running total: $106bn
>
> The side effect of capital flight is to continue to push the ruble's value
> down, which fell 10% on the start of hostilities. Russians were already
> beginning to panic in December as the ruble has been under pressure for
> months. The population were converting rubles to dollars at a record pace
> in December -- about $2bn a month, or a total of $6bn since the New Year,
> but that too accelerated in March: the CBR was forced to spend $11bn on
> trying to prop the ruble up in the last month.
>
> Running total: $117bn
>
> And the loss of this money to the economy was before Russia spent a penny
> on actually running its military campaign, currently estimated to have
> cost $50bn-70bn -- more than it cost to put the Sochi Olympics on. With an
> estimated 60,000 Russian soldiers massed on the Ukrainian border, that
> number is climbing daily.
>
> Running total: $187bn
>
> Rest of this year
>
> That bill is only the tip of the iceberg. Even if a deal with the EU and
> Maidan government were signed today, the costs from the shock Putin has
> given the West is going to reverberate all year, if not longer.
>
> The most obvious direct cost to the Kremlin of taking over Crimea is
> Russia is going to have to pay to keep the region going. The Kremlin has
> already sent a reported $440m in cash to tide Crimea over, but an article
> in Vedomosti put the annual cost of subsidies, pension payments etc. at
> $3bn a year.
>
> Putin is well aware of the cost of taking on crappy regions: after taking
> over Abkhazia, a breakaway region of Georgia, Russian grants now make up
> 70% of the region's budget for several years -- and half of that was
> stolen by the local elites, according to reports. Crimea is unlikely to be
> different.
>
> Running total: $190bn
>
> However, the cost of running Crimea is the least of the Kremlin's worries.
> Once the dust literally settles, attention will inevitably turn to the
> dire state of Ukraine's economy: the country is bankrupt and on the verge
> of collapse. It needs billions of dollars of aid keep it running.
>
> Some of Russia's largest banks are exposed to Ukrainian risk directly and
> via their subsidiaries to the tune of $30bn, according to estimates by
> Moody's Investors Service. More than half of these exposures ($17.4bn) are
> via subsidiaries of Russian banks and some or all of this could be lost if
> the banking sector collapses. Indeed, if the EU "takes" Ukraine, it is not
> unlikely that Russia will precipitate a collapse on purpose.
>
> Running total: $223bn
>
> http://www.bne.eu/pics/1/5875_0314_Russia_banks_Ukrainian_subsidiaries.jpg
>
> Almost as much money that left Russia in all of last year ($63bn) had
> already fled by the end of March and the CBR spent a total $30bn in 2013
> defending the currency. This year capital flight is expected to soar to
> $130bn, says Goldman Sachs, which means the CBR will probably have to
> double its interventions to some $60bn to keep some sort of currency
> stability.
>
> "The Achilles heel of the Russian economy remains the flow abroad of
> Russian capital following any shock. We would also think that any
> sanctions or even the threat of sanctions will be ultimately targeted at
> these flows," Goldman said in a note.
>
> Running total: $283bn
>
> Capital flight will only pull the weakening ruble down further, which in
> turn increases the costs to the budget. The ruble has already fallen by
> 10% this year, but Renaissance Capital estimates that a further fall in
> the ruble's value this year will add another $10bn to the government's
> costs.
>
> Running total: $293bn
>
> The incursion into Crimea was as much a shock to Russia's business leaders
> as it was to the politicians in Brussels and Washington, and is bound to
> hurt domestic investment. Russia desperately needs fixed investment to
> rise if it is to have any chance of economic growth this year, but
> investment had already stalled by last year. Now there is talk of war,
> Russia's business captains are even less likely to invest than before.
> Fixed investment into the Russian economy totaled RUB2.33 trillion
> ($77.76bn) in 2013, but Bank of America Merrill Lynch forecasts that
> investments in fixed capital will decrease 3.3% as of the end of 2014, or
> by about $2.33bn.
>
> Running total: $295bn
>
> Russia attracted a whopping $94bn of foreign direct investment (FDI) in
> 2013, making Russia the third largest recipient of FDI in the world,
> according to a February ranking by the UNCTAD, although a big chunk of
> that was part of the TNK-BP/Rosneft deal. But if Russian investors are
> unnerved, can you image how the foreign investors feel? By the middle of
> March several big deals were already looking shaky.
>
> Again, it is impossible to measure just how many
> deals-that-might-have-been are now on ice, but some high-profile joint
> ventures are already in trouble. Swedish car producer Volvo said in March
> it was taking a second look at a proposed partnership with Russian
> state-owned railway equipment and tank maker Uralvagonzavod (UVZ) to make
> modern armored cars due to the situation in Ukraine, worth about $100m
>
> Separately, state-owned oil major Rosneft signed a binding deal to sell
> its oil-trading arm to Morgan Stanley in December for hundreds of millions
> of dollars. That deal is now in doubt and may be nixed by the US Foreign
> Investments Committee.
>
> Assuming a modest 20% contraction in FDI against last year, that would
> wipe out another $19bn of money lost to the economy.
>
> "A significant decline in FDI -- which brings not only money but also
> modern technology and managerial skills -- would hit Russia's long-term
> economic growth hard. And denying Russian banks and firms access to the US
> (and possibly European) banking system -- the harshest sanction applied to
> Iran -- would have a devastating impact," says Guriev.
>
> Running total: $314bn
>
> The stock market has already been hit, but it could be hit again if its
> performance in recent years is anything to go by: the RTS index was down
> by 72.4% in 2008, 21.9% in 2011 and 6.8% in 2013 on crisis-related fears.
> Predictions for this year's gains were already modest, but there is a very
> real chance that Russian stocks will return a loss instead. Assuming a
> modest 5% year-on-year fall for the full year, that would destroy another
> $50bn of market capitalization.
>
> Running total: $364bn
>
> Even if the market remains flat, collateral damage could be a string of
> IPOs that were on the docket, but are now almost certainly going to be
> cancelled. Regional shoe retailer Obuv Rossii has already postponed its
> $55m IPO until the second half of the year (if then) due to the brouhaha.
> And the IPO plans of much larger companies are in doubt: retailer Lenta,
> childrens' store Detski Mir, German wholesaler Metro and retail bank
> Credit Bank of Moscow were all also hoping to get IPOs away this year (and
> raise $1bn, $440m, 1.7bn Euro and $500m respectively), collectively worth
> $4bn.
>
> Running total: $368bn
>
> And those are just the privately owned companies with listing aspirations;
> the state was hoping to restart its long-delayed privatization programme
> in the second half of this year, after an IPO window opened briefly in the
> second half of last year. Fat chance that foreign investors will fork out
> billions of dollars for shares in state-owned enterprises now. Given
> state-owned Sberbank raised just over $5bn last year with a secondary
> public offering, pencil in the same this year for the non-privatization
> programme.
>
> Running total: $373bn
>
> The bogeyman of financial sanctions has been raised as a possible punitive
> reaction by the West against Russia's aggression in Ukraine, but actually
> it is highly unlikely because western banks are so heavily exposed to
> Russia: according to Bank of International Settlements (BIS) data,
> European banks have $193.8bn in exposure to Russia, US banks $35.2bn,
> Japan $17.2bn, Switzerland $8bn, and South Korea $5.2bn. If the West tries
> to freeze Russian assets abroad, Russia could easily retaliate by refusing
> to pay these debts back.
>
> Likewise, oil and gas majors Rosneft and Gazprom owe a combined $90bn in
> debt and bonds with four state banks Sberbank, VTB, VEB, Rosselkhozbank
> owing another $60bn in foreign credits. A Kremlin aide has already warned
> that if financial sanctions are imposed on Russia, these institutions
> might refuse to pay their loans off.
>
> But where Russia will be hurt, even without sanctions, is with bond
> issues. Russia's sovereign external debt is very modest indeed, but its
> external commercial debt has soared in recent years (although the
> maturities now are a lot longer than they were in 2008): Russia's total
> external debt rose to $732bn as of January 1, 2014, from $636bn a year
> earlier and $464bn at the start of 2008, according to the CBR, with the
> bulk of new debt raised by Russian state companies.
>
> Although state-owned Gazprom Neft got a $2.5bn syndicated loan deal away
> in the middle of March, largely financed by a club of European and US
> banks, plans by another 10 big Russian companies to raise $8bn in loans
> this month are reportedly in difficulty now.
>
> Running total: $396bn
>
> At the same time, the cost of these bonds has already increased
> significantly. Last year saw a boom in Russian bond issues when yields
> fell to about the 4% for state and quasi-state issues, but the rates have
> more-or-less doubled on the government's OFZ in recent months, which broke
> through 9% earlier this month.
>
> http://www.bne.eu/pics/1/5875_0314_Russia_bond_yeilds.jpg
>
> Again it is very hard to guess the value of bonds-that-might-have-been.
> But given Russian corporates were adding approximately $60bn of debt a
> year over the last five years, and again assuming a modest 20% reduction
> in bond issues, the value of bonds that won't be issued will be on the
> order of $12bn.
>
> Likewise, making a guestimate of the extra cost this borrowing will come
> in at due to the rise in yields caused by the crisis could add at least
> another $3bn.
>
> Running total: $411bn
>
> The spillover from the crisis is also going to hurt the banking sector and
> cost it money in the form of the need for higher capital and an increase
> in bad debt. According to bankers in Moscow, corporate non-performing
> loans are already rising and lending will slow even further: Fitch says
> that Tier 1 capital could be reduced by up to 2%, which would be worth
> $12bn.
>
> Running total: $423bn
>
> Bad loan levels were already accelerating on the back of the economic
> slowdown, but that problem will get even worse now.
>
> "In light of the potential economic slowdown, we expect nonperforming
> loans (NPLs) in the system to increase. Our base-case forecast estimates a
> system-wide NPL ratio of 8.0%-8.5% this year, and could go higher if the
> current volatility persists," says Moody's.
>
> The National Collection Service estimates total bad loans have reached
> about RUB435bn ($12.8bn). And if this only increases by the same 40% that
> it grew last year, it will be another $5bn lost to the economy.
>
> Running total: $428bn
>
> Corporate loans will also be affected. "There is a risk that the currency
> devaluation will exacerbate negative asset quality trends in foreign
> currency loans, which we estimate constitute around 17% of the total loan
> book and are mainly concentrated in corporates. Approximately 50% of these
> loans are to borrowers that do not have matching foreign currency cash
> flows and they would need to absorb the increased repayment burden caused
> by the ruble depreciation," Moody's said in a report, without putting any
> actual numbers on the cost. Let's call it another $5bn.
>
> Running total: $433bn
>
> Ironically, trade is probably one area that will be least affected.
> Indeed, it is the heavy trade flow between Russia and Europe that makes
> the European powers like Germany so reluctant to slap sanctions on Russia.
> About half of Russia's exports go to Europe, but only 3% to the US.
> Conversely, only 7% of Europe's exports go to Russia (and next to no US
> exports). But in money terms, the EU exports more to Russia ($264bn) than
> Russia to the EU ($152bn). The upshot is trade sanctions can be ruled out
> because Russia carries a very big stick in any trade war.
>
> Whatever happens next, the crisis has already ruined Russia's chances for
> economic recovery this year. Last year Russia put in a very disappointing
> 1.4% growth but analysts were hoping this year would be better, predicting
> between 2% and 3.5% growth for the full year. The recovery that should
> have come last year would arrive this year. Not any more. Goldman Sachs,
> among many, downgraded Russia's growth outlook to 1% at best on March 14.
> Other analysts are speculating the economy may even contract this year. A
> 0.5% contraction would destroy another $10bn of value.
>
> Running total: $443bn
>
> http://www.bne.eu/pics/1/5875_0314_Russia_infographic_trade_EU.jpg
>
>
>
>
>
>
> InfoUkes Inc. Gerald William Kokodyniak
> Suite 185, 3044 Bloor Street West Webmaster InfoUkes Inc.
> Etobicoke, Ontario [email protected]
> Canada M8X 2Y8 http://www.infoukes.com/
>
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