Did you know that the world's most closely-watched international credit rating agency just placed Russia's credit risk on the same level as Lebanon's? You read that right: in the eyes of Moody's Investor Services, Russia's sovereign debt is as bad a place to park your money as Lebanon: a country so politically unstable and dangerous-it is occupied by two foreign warring armies and home to the world's most notorious terrorist organizations-that the American government, until last July, forbade its citizens to travel there.
Not that things are much better now; as the State Department's most recent travel advisory warns, "The expiration of the passport restriction [..] should not be in any way construed as a determination by the State Department that it is safe for Americans to travel to Lebanon." Lebanon: so fucked that it suffered the misfortune of becoming the title of a Human League comeback single.
While Hizbollah irregulars might have fired their Kalashnikovs into the air last Friday to celebrate Moody's pairing their credit worthiness with the largest, most resource-rich nation on earth, there is no joy in I-invested-in-Russia-and-all-I-got-was-this-fucking-T-shirt-ville.
The Moody's downgrade means that Russia has now officially been demoted to the bottom tier of risk and instability in the eyes of Western investors. Risk of every kind: of debt default, financial collapse, and worse, the very real risk of social and political upheaval. This time, the upheaval probably won't be confined to a band of smelly-underwear dreamers barricaded in a bright white downtown bull's eye; this time, the entire country could explode.
In fact, it already is. It's been simmering at an ever-increasing temperature for some time now. You just didn't know it.
Everyone else does. Moody's knows it. The Russian press knows it-they've been writing about the crisis for years now. The entire Russian populace around you knows what's going on. Foreign investors know it: their assessment of every situation is always quantifiable in stock market averages, government yields, and currencies. And what they're saying is, Russia is fucked.
Following the first Moody's downgrade in March, Moscow Times interim editor Geoff Winestock, in an editorial entitled "Downgrade By Moody's Badly Timed," wrote, "Credit rating agencies like Moody's Investor Services are supposed to warn investors about risks ahead. But in its recent decision to downgrade its appraisal of Russia, Moody's is lagging well behind the times... Moody's has clearly failed if it sees its mission as warning investors of storm clouds on the horizon. [Italics ours-Ed]." The editorial, incidentally, was written on Friday the 13th. In two months' time, the market dropped almost in half-again.
When the most recent meltdown first started, The Moscow Times pulled out the whitewash and scrubbed away. When Yukos defaulted on a loan to foreign investors at the end of April, the Times wrote, "Oil major Yuksi has committed a technical [eXile's bold] default on a $500 million loan from Western banks..." What is a "technical" default? Is it a better default? A kind of neutral, technocratic, roll-up-yer-sleeves inability to pay back the loan, instead of a the usual, catastrophic, "Sorry bub, I ain't got no money" excuse? Two weeks ago, World Bank president James Wolfensohn, whose only job is to jetset around the world and cheer-lead for hopeless economies, conceded that Russia's situation was a full-blown financial crisis and "no laughing matter." That quote was buried in the sixth paragraph of an MT article headlined, "President Promises Financial Stability." Well, no shit he does. What else is he going to promise? More corruption? A worsening debt bubble? Bad marriages and untimely deaths for all? On the day that Suharto resigned as president of Indonesia, the Times upped the Orwellian farce by splashing the front page with the Soviet-like poster headline, "Russia Far From Indonesia Scenario," joined on page 10 by a classic Winestock editorial, "Russia Won't Follow Path of Indonesia," which included these memorable moments: "The Russian economy may not grow hugely this year, but neither is it likely to contract"; "Russia knows corruption, but Suharto ran his country like a family business" [in surveys conducted by The Economist, the EBRD and Control Risks Group, Russia ranked either first or third in the world in corruption, while Indonesia never even made the top 10-Ed]; and "the legitimacy of the government is not in question. Both democratically elected President Boris Yeltsin and Prime Minister Sergei Kiriyenko, who was approved by the State Duma, have a clear popular mandate to take the necessary measures." He concludes, even as the lava sweeps outside his window, "Russia is moving on the road to stability." Yeah, right; and monkeys might fly out of our butts...
But the truth may be too loud to ignore. Just yesterday, in a editorial headlined "The IMF Must Act Fast if Ruble Falls," the panicked interim editor screeched, "What is the IMF doing?"
When panic hits, and horror confronts us, people react irrationally. A terminally ill patient will often take months to come to terms with his finality. Perhaps that explains the Times' bizarre, irresponsible reporting of late: a simple case of denial.
And why not? Not only has Russia's credit rating has been downgraded to Lebanon-status, but it now sits a notch below Jamaica's. That's right: Jamaica, whose per-capita income in 1995 was $1,510, making it one of the poorest nations on earth, is now deemed more stable and safe than Russia.
You may have thought Jamaica was just a backwater, Third World ex-slave colony famous for irritatingly slow music and a hairstyle favored by suburban skate rats... but according to Moody's rating service, compared to Russia, buying Jamaica is plain good sense.
Moody's downgrade last Friday means that Russian state bonds have dropped from Ba3 "speculative" status to B1 "investment risk"-the risk of default is no longer merely speculative but real. Moody's catalogued Russia's structural problems: ``fiscal imbalances, external sector inefficiencies, political instability, lack of policy credibility and an inhospitable socio-juridical environment for foreign investment.''
When a former superpower's sovereign debt is downgraded to sub-speculative status and placed on the level of war-torn, occupied, third world countries, you'd think it would be big news. It is. Maybe too big. That's the only non-paranoiac excuse we could think of for their bizarre cover-up of this past month's events-a "crisis" whose roots lie in the near-total failure of the reformist government's attempts, over the past six and half years, to create a rational, civilized economy. A cover-up, in fact, that parallels the cover-up of the reformers sins dating back to 1992.
It is as if EVERYTHING is wrong here.
The most recent "crisis" is, by most Russian estimates, merely a nasty lesion on the body of a terminally ill patient.
Moscow's stock market has crashed a stunning 70% from its highs last August, wiping out tens of billions of dollars of wealth. Interest rates on GKOs (short-term treasury bills), have quintupled to more than 75% since last fall. The Russian economy has experienced what most economists say is the most severe depression of any major economy this century, falling over 40 percent since 1989. By last autumn, it appeared that the depression had bottomed out, and Russia might finally be set for slow growth; now, the best people hope for is to avoid a financial meltdown.
"I've lost my sense of humor because the house is falling down," said Eric Kraus, chief strategist for Regent European Securities in Moscow.
Bernie Sucher, Co-head of Sales and Trading at Troika Dialog Bank, has worked in emerging markets before in Latin America, but he said, "I've never seen anything like this before. [The meltdown] has been so comprehensive. An incredible amount of wealth has been destroyed in the equity markets, and the losses in the credit markets have been enormous. I'm reaching for a similar example, and only Mexico and Indonesia come to mind."
Russia and Indonesia: the comparison, whether negatively or positively, is impossible to avoid.
"What's frustrating is that this could all have been easily avoided by the government," he said. "And they can still pull out of it, but they'll have to act."
When reforms started, the Gaidar government opened up the domestic markets to foreign competition, on the theory that inefficient producers would be forced to compete or die. Most died, in part because the goods couldn't compete, but also due to massive corruption in which newly "privatized" companies were bled dry by upper management. Importers of goods solidified their positions by forming tight relationships with the right government officials. Personal bribes substituted for import taxes: they were far cheaper, and far more effective-while the factories that produce Russian goods were taxed and embezzled into oblivion. It became, in other words, more profitable for those in power to strip local industry, and import foreign goods. The result is that today, 60 percent of goods sold in Russia are imported, leading to dollarization and reliance on Western money for stability.
Practically the only valuable assets remaining are Russia's raw materials. However, even this last refuge of wealth, tightly concentrated in a few hands, was destabilized late last year when commodity prices-particularly oil, gas and precious metals-collapsed, falling between 20 and 40 percent between December and March.
A massive public and private debt bubble, at last publicly recognized by both Prime Minister Sergei Kiriyenko and Deputy Minister Boris Nemtsov last weekend, has burst. Kiriyenko, when he was still fighting for his confirmation in mid-April, gave a report to the Duma outlining the nation's problems.
"Expenditures are growing to service the interest on the state debt," he wrote, "and already make up over 30% of the budget expenditures. This situation will grow worse this year and next." At the time he wrote this, interest on GKOs were half what they are today.
In terms of a crisis time-graph, Russia appears to be about where Southeast Asia was a year ago. A debt bubble pops when liquidity dries up. This summer, it is estimated that billions of dollars of private and public debt will come due. GKO rates will rise to attract investors, increasing the state's costs and reducing the amount of money it can allocate to unpaid workers and decaying infrastructure. Banks and companies can't pay-they are almost totally illiquid, with banks stretched from taking aggressive positions during the bull market bubble, and raw materials conglomerates that feed the major banks are now sapped for cash due to the commodities price collapse. They'll need money from one guy to pay the other guy; but after the Asian crash, there is no "other guy" to get money from. Which is to say, the game's up. Private foreign lenders will be reluctant to roll over debt, let alone arrange new loans. The outcome is likely massive defaults, which will lead to further erosion of the financial markets, which means even less liquidity, which leads to more defaults, and so on, and so on...
It has often been said that Asia's problems stemmed from a combination of endemic corruption, a lack of transparency, and a tight link between a group of all-powerful financiers and the state. Russia, by comparison, has consistently been ranked at the very top of surveys on corruption, leaving the relatively squeaky-clean Southeast Asians looking like Amish school teachers by comparison. The problem is that corruption is deeply embedded in the present regime. According to Kiriyenko's Duma report, Russia has added 1,200,000 new officials to the state payroll between 1992 and 1997, or since the start of "reform." This represents a more than doubling of the bureaucracy over the supposedly bloated Soviet bureaucracy, a statistic which never ceases to shock foreigners. Last year alone, budget outlays to maintain the bureaucracy increased 62%! This reflects the entrenched nature of state corruption, which always seeks to enlarge itself as a means of protecting itself. The more tangled the bureaucracy, the more opportunity for corruption; the more tangled the laws and tax codes, the more opportunity for corruption; and the larger the bureaucracy, the more powerful it grows, which leads to back to... drum roll please!... more corruption!
As for oligarchs, Russia needs no introductions.
Molly McKeown, portfolio manager for Standard Bank out of London, told the eXile, "Russia has raised the concept of 'crony capitalism' to new heights, to levels they can't even dream of in Asia." McKeown recently divested her fund of all Russian GKOs; previously, GKOs made up 10 percent of the portfolio.
It's true that Russia, although acutely suffering from a similar debt/liquidity bubble that popped in Asia, is a completely different animal. A dead animal. Let's say, a dead bear with bull horns, whose putrid stench can no longer be ignored even by the vultures.
Compare: Asia entered its crisis on the heels of decades of unprecedented economic growth, massive infrastructural investments, and impressive reductions in poverty; Russia enters the present crisis in the depths of the century's worst depression, following a decade of infrastructural collapse, capital flight, a population decline, and a re-acquaintance with the kind of mass poverty not seen here since the 1930s. Today, between a quarter and a third of Russia's population lives below the government's own meager definition of minimal subsistence.
Now, with the banking system and national treasury teetering, and enormous amounts of private Russian wealth wiped out, it looks like Russia, illiquid, is returning to the familiar depression it had claimed to have left behind last fall.
On top of it all, the country is led by a government and leader who lack legitimacy. Besides Chubais, Yeltsin must be the most despised living man in Russia. Scientific surveys and opinion polls repeatedly put his approval ratings in the low single-digits. While most Westerners cannot believe that Yeltsin is an illegitimate leader-he was elected, after all, in a relatively free election-it helps to remember that two democratically elected regimes were overthrown last year, a Socialist one in Bulgaria, and a "Western-oriented" reformist president in Albania. Democracy does not inherently bequeath legitimacy; rather, it is considered a more effective means for creating legitimacy than passing the throne on to your drooling, mango-faced, inbred son. In fact, it seems that the present regime uses the trappings of democracy to create legitimacy not at home, but rather abroad, in the West. And thus far, it seems to have worked.
That this regime is illegitimate is not at all shocking to Russians, but it's heresy to Westerners. Until now. Professor Peter Reddaway, whose anti-Chubais editorial in The Washington Post in September last year caused a political furor, testified on May 20th before the Senate Foreign Relations Committee in a hearing on Russia Policy. In his testimony, Reddaway declared, "While the government is formally legitimate, because elections have so far been held, it lacks much real legitimacy. People see it-accurately, in my view-as being much more concerned about the interests of a small elite than about the public interest." In fact, Reddaway argues, those in power have little more than contempt for both Russia and its citizens, and serve only the elite. Quoting from a book by Igor Chubais, brother of the former First Deputy Prime Minister, the power elite views the Russian people as "simply an annoying, tiresome nuisance, which, moreover, for some reason has to be paid wages."
Economic disaster, social decay, a massive corrupt bureaucracy, an illegitimate regime totally cut off from and contemptuous of its citizens... all that's missing is the social upheaval. But wait, there has been-IS-social upheaval, scads of it (see below). It just doesn't make it into the Western press. But the protests are there, protests that would shock the leadership of any civilized country into action or resignation.
There is only one positive development that the Yeltsin regime can point to: taming the hyperinflation that his own reforms sparked. It hardly has Russians dancing in the streets; after all, the price of the hyperinflation was their savings and their standard of living; and the price of the subsequent stabilization was delayed wages, closed factories, mass layoffs, and a reliance on debt to service the budget-debt which, increasingly, became a bubble, a bubble that burst, and which now, as the ripple-effects begin to spread, will result in further hardships, if not outright collapse.
Another whitewash Westerners are pushing on this crisis is, "Okay, it's happening, but it doesn't really matter." Bruce Bean, president of the American Chamber of Commerce in Moscow, was quoted in The Baltimore Sun as a kind of grotesque Robocop-villain when he commented, "Do you know any Russians who own stock? It's a media event."
Actually, most of you probably do know several Russians who not only own stock but work for companies whose fortunes are directly or indirectly tied to banking; Bean could probably count 50 to 100 such Russians off the top of his head. The market collapse will take a toll.
"The market falls should lead to layoffs," Sucher said. "It will hurt."
Here's why. When players get burned in a market, it takes several quarters, even years, for them to return. So the markets stay depressed. That means companies can't raise money on the capital markets. So investment remains paralyzed, and jobs aren't created, but rather slashed.
There are large numbers of emerging-middle and upper-middle class Russians whose employment and fortunes are tied, directly or indirectly, to the fate of the stock market. When banks collapse, brokerages close down, wealth is eliminated, jobs get slashed, fewer goods are bought. And, as evidenced by the Tokobank collapse, banks-even the darlings of the West-are already going. It's all so bleak that even we can't find anything to laugh about. That would be like laughing at road kill, and even road kill deserves dignity.
If other bear markets and financial crises are any indicator, we are just entering a new and dangerous phase of Russia's 9-year crisis, with lulls of false sunshine between the downpours of fiscal napalm. Because Russia, at least under the present regime, has, after years of cynical waste, corruption, and nihilism, squandered everything, right down to the names and words associated with it, leaving the country stuck in so many Catch-22s that no matter what way it moves, it suffers. Below is a list of the Savage 6 Catch-22s Explaining Why Russia Is Fucked.
The eXile's Savage 6 Catch-22s Explaining Why Russia Is Fucked
Often, in order to stimulate an economy in recession, governments will take the exact opposite approach and allow their currencies to DEVALUE. Locally produced goods then become cheaper for export to healthier economies, while locals are swayed to buy local, since imports become too expensive. America successfully did this in the early 90s, leading to one of the greatest periods of growth in US history; last year, Japan began to devaluate its way out of its recession. However, there's another Catch-22 here: Russia doesn't produce goods for exports anymore-only raw materials. And it is so reliant on imports that any currency devaluation would ignite inflation. Double Catch-22: With the recent collapse in commodities prices, exporters are pushing the government to devalue the ruble in order to make their commodities more competitive. They are suffering a liquidity squeeze. They are also just about the only sector of the economy that is relatively successful, so a collapse in this sector could lead to layoffs, delayed wages, and social upheaval. However, the catch is that the ruble cannot be devalued, because it could also lead to social upheaval. So if the ruble collapses, the country's screwed; and if it's value is maintained, its economy will collapse.
Boris Yeltsin's Regime
If America decides to abandon Yeltsin in order to rescue its credibility with the Russian people, it risks "losing" Russia to someone far more hostile-and, don't forget, armed to the teeth with enough MIRVs to set off a small Quasar explosion detectable by aliens billions of light years away. As for Russians: they voted for the democrats in '90, and lost everything. They voted fascist in '93, and lost Chechnya. So they voted Communist in '95, and guess what?...they STILL got robbed, as workers stopped receiving their wages. No matter what the Russians want, they will always get it worse, in spades. What's a po' nigga to do? The catch: Yeltsin is killing Russia, but anyone else might kill it faster.
A subplot to this is that Bearded lefties of color and right wing laissez-faire nuts in the US Congress have formed an anti-IMF funding alliance. Which means that there is a serious worry that the IMF may not have the liquidity to bail out Russia. Russian hard currency reserves are less than $10 billion, while investors presently hold $70 billion in notes, including $22 billion by foreigners-meaning, quite simply, the Central Bank does not have enough reserves to defend against a sudden flight. Here's the catch: Congressmen want to teach the irresponsible Russians a lesson; but the only way they'll learn is if they're thrown out of power, which means pizdets for everyone and all.
The Tax Code
Until just a few weeks ago, this scam worked fine. But then the workers' strikes broke free. And it began to look like unrest, of the sort everyone saw in Southeast Asia. Perhaps the workers really have reached their breaking point. If so, then what is the government to do? If they pay the workers, then they won't have enough to pay off the bankers and foreigners, which means they won't be able to service the next round of debt, which means... there'll be no money for anyone. But the other option, not paying the workers, could lead to even more severe protests, which leads to a crisis in confidence, political instability, and, well, bankers and foreigners fleeing the markets, meaning once again there's no money for anyone. Which means... no matter what, there'll be no money for anyone!
In order to attract capital here, the government has had to offer high rates on T-bills. But that saps money away from investments. But-But if the T-bill rates weren't high, then the money wouldn't come here at all. When T-bill rates fell last year, many banks suffered, while others switched into the high-flying stock market. And then that crashed. If they'd invested into the economy, they might have done better, but why invest in the long-term when the short-term is so much more attractive? You don't. You speculate and invest for the short-term. And if the short-term choices dry up, then you pack up your Ben Franklins and head to Switzerland. (On the same day that Moody's downgraded Russian sovereign debt, the Swiss franc rose against other currencies as a safe haven for Russian capital.) Meanwhile, even though YOU'RE not interested in investing for the long-term in Russia, make sure no one else can either-after all, you might be interested some day. Some day. In the meantime, other speculative investors, like George Soros, move the market, while dedicated investors either get burned or stay out. The catch is this: Russia needs its own investors to invest speculatively, i.e., in government debt, because someone's gotta buy it. This means no one's investing into Russia, which means continued depression. And because of the depression, the budget has holes. And when the budget has holes, people are afraid to buy GKOs. So the rates have to rise higher to attract speculators. Meaning even LESS money is going into investment. It's a kind of self-propelling vicious circle that ensures only one thing: in the end, Russia is fucked. No matter what.
For now, the most likely scenario is that Russia will crawl out of this "crisis," be declared healthy, then, unexpectedly, collapse again, even further. If and when the arthritic back of the present regime will snap is anyone's guess. But in the meantime, Kiriyenko has his work cut out for him. For now, he's got to work hard to improve Russia's credibility, so that hopefully, in the not-too-distant future, some potential investor will look at Russian debt and say, "Jah man, ees not bad man. Ees as good as me Jamaican sheet. An' you know, you could do wus, man. You could be buying de Lebanon sheet. An dat sheet really bad, man."
This is an image map. Click on a number.
1. Prokopiyevsk, Siberia, May 21. Several hundred miners, teachers and doctors block the last remaining detour along the Trans-Siberian railroad.
2. Kharkassia, May 21. Teachers block five highways in the regional capital.
3. Vladivostok, May 19. 200 scientists from the Academy of Sciences, whose wages have dipped to $50 a month, dropped their books and stood around on the highway, blocking traffic.
4. Pechora, northern Russia, May 19. Fund-raising campaign to send 1,000 protesters to Moscow begins amid railway blockages.
5. Rostov-Na-Donu, May 18. 2,000 coal miners block the North Caucasus railway in protest over lost jobs and unpaid wages.
6. Anzhero-Sudzhensk, Siberia, May 15. Thousands of miners block the Trans-Siberian railway.
7. Kuzbass, May 15. Thousands of miners, teachers, doctors, and other budget workers block railways.
8. Vorkuta, May 15. Inta miners block the Vorkuta-Moscow railway line.
9. St. Petersburg region, April 9. On a day in which 2 million workers nationwide participate in work stoppages, some 200,000 people march in the St. Petersburg region.
10. Yekaterinburg, March 17. Several hundred workers of defense factories protest not having been paid for over a year.
11. Karelia, March-April. Some 60 public utilities workers go on a three-week hunger strike until local officials distribute 100 million rubles. No one compares any of them to Bobby Sands.
12. Kaliningrad, March 18. 500 workers of the Yanta shipyard prove you don't need to be connected to the rest of Russia to be angry, protesting 6 months of unpaid wages.
13. Vorkuta, March 16. Pechora coal miners announce that since hunger strikes and work stoppages have been ineffective, they're going to try something else.
14. Nakhodka, March 14. Fishermen on board the Sovietskiye Zapolarye barricade themselves on board, and not just because Nakhodka has such a high crime rate. They hadn't been paid for over 18 months.
15. Yakutsk, March 13. Air traffic controllers end a lengthy strike, but the airport stays closed because drivers of support vehicles at the Yakutsk airport went on strike two days earlier.
16. Norilsk, March 12. 1,480 elevators in Potaninville are turned off when elevator workers protest non-payment. No one anywhere can remember that many elevators turning off at once.
17. Solikamsk, March 12. 1,500 miners, budzhetniki and other unfortunates cut off the Moscow-Solikamsk highway for two hours.
18. Lyttleton, New Zealand, March 9. 91 Russian seamen effectively defect to New Zealand, refusing to budge until they're paid almost $1 million in back wages.
19. Gulf of Finland, March 9. Wives of fishermen of the Preobrazhensk trawler fleet send a letter accusing the company of deliberately getting their husbands addicted to alcohol, since that's what the company's been paying instead of money.
20. Irkutsk, Siberia, March 4. Health official Gregory Gubin kidnapped by workers who find documents showing he might have been allotted money for their wages. They let him go right away.
21. Sakhalin, February 20. Miners in the Sakhalin region go on strike.
22. Primorye, February 17. Fish factory director in township of Kamenka taken hostage for four hours by subordinates demanding wages.
23. Magadan, February 16. TV shut off for a few hours in Magadan as Tele-Radio broadcast workers protest-you guessed it-unpaid back wages. No one stops any elevators.
24. Kovrov, February 13. Just a stone's throw from Moscow, workers kidnap the chief engineer of an instrument-making plant to protest unpaid wages, then release him "on parole" to go find money for them.
25. Vladivostok, February 13. Workers at the power station supplying Russia's pacific fleet go on strike, leaving nuclear ships idle.
26. Volzhsky, February 13. Maintenence men all over town stop servicing buildings in response to a 10 billion ruble debt.
27. Samara, February 12. Workers strike at Maslennikov military factory. Fourth-Ball-Bearing-Plant workers feed strikers out of their pockets, freeing more room for those fourth balls.
28. Ulan-Ude, February 9. Workers at the Guzinnozerskaya power plant go on strike to protest a debt of nearly a billion new rubles to workers. Republic President Leonid Potapov, a frequenter of Mongolian faith-healers, forced to personally intervene.
29. Khabarovsk, February 8. As if you weren't depressed enough already, children joined their striking miner parents in an underground hunger strike at the Nizhneamurzoloto company.
30. Novosibirsk, February 6. Workers on an underground railway passage stop working 18 months after they were last paid.
Source: the Pay Us Our Wages Wesbite