Russia’s bailout package just keeps getting bigger

Just as Russia seems poised to loan Iceland $5+ billion ($4b Euros) to stem a run on Iceland, President Medvedev announced $37 billion in new long-term loans into state banks. By our best guess (and assuming that the funds are not double counted) Russia’s bailout seems to be in the neighborhood of $180 billion. (Bloomberg says $200 billion). These are incredible sums of money – and a reflection of the enormous shift in funds from developed to developing countries. Yet could it be not enough?

All in all, Russia has pledged funds exceeding 10% of its GDP. For those of you, like us who might have been getting confused by the dizzying numbers, we present is a list of Russia’s capital injections. Where possible we’ve tried to identify where the money is coming. But this is an incomplete list – comments and corrections welcome.

Before getting to the bailout package per se, a few words on the rouble and the CBR’s intervention. Other funds have gone to support the rouble– as much as $5 bln October 7.

Consensus suggests that the CBR is now trying to defend the current levels lest a further fall in the rouble contribute to slowing domestic demand or a bank run, which Russia has so far avoided. However, there is evidence that a significant part of the pressure on the rouble now comes from domestic investors shifting into the dollar (and to a lesser extent the euro). Further depreciation of the rouble could provide a further crimp to domestic consumption and not just of Russia’s rich. Already car sales, an indication both of loan conditions and domestic demand – are slowing. And despite still buoyant property markets, some projects are now being put on hold and property developers are likely the most vulnerable to the withdrawal of credit.

Yet despite all this cash, another major problem persists –there is uncertainty about where the funds have gone and the banks that are the main recipients of the funds are reluctant to loan money on to other financial institutions. In fact today (Wednesday) the interbank rate spiked back up to 9% as banks scrambled to find capital and trading was suspended again after the Micex and RTS suffered another day of double digit losses. This comes after almost 20% losses on Monday, the largest one day losses in decades, and further losses yesterday.

Yet for Russia’s policies to really have an effect, an improvement in global credit conditions and an end to global panicked sales may be needed. The continued global selloffs , and persistently elevated credit costs, created a domino effect with Russian equity. With the oil price still falling (though Chris Weafer of Uralsib suggests that the RTS is already pricing in $50 oil), domestic liquidity is suffering and loans and deals made with $100+ barrel oil need to be reassessed.   Withdrawal of foreign investors in July, August and September contributed to rapid sales which then contributed to margin calls on the local investors who were still in the market… this trend has continued and continued

Today’s trading halt is likely to extend until the 10th (friday) unless the regulators change their minds. Unlike markets like Brazil or Indonesia where trading halts are dictated by a maximum loss, in Russia halts are at the discretion of the regulator. So what is Russia trying to accomplish with the halt? Likely an attempt to freeze trading in the hopes that global trading becomes more calm and to buy time until they come up with a solution. though it may need different tools than the liquidity injections to date. After all, with the external climate worsening, freezing the market had only a limited reprieve Sep 19. So unless global conditions improve, its hard to see Russia leading the rally. Yet, Russian authorities should use this opportunity to really look at the vulnerabilities within the economy that are being exposed.

Monday’s decision to add long-term financing is the next step to boost liquidity but it is not clear that the mechanisms are in place to ensure that the capital provided to the banks will be lent on to other entities especially the corporate sector, let alone the smaller banks that are really in need of capital. In fact more consolidation and direct capital injections may be the next step, particularly of finance firms and banks more exposed to the property markets.

So the partial list

Russia will provide $37bn in long-term subordinated loans into state-controlled banks. Such long-term funds through the big banks – in this move it aims to provide long-term (5 year) liquidity to the banking sector and corporations. OAO Sberbank, Russia’s biggest lender, should get more than half of the planned loans or 500 billion rubles ($19 billion), and No. 2 bank VTB Group may borrow 200 billion rubles. The idea though is that they will loan out some of these funds to companies.

About half of this money will come from the central  bank – especially that which will go to Sberbank, which it primarily owns.  ING writes “The Russian government will provide the remaining US$17bn, out of which VTB and Rosselkhozbank  should receive US$7.6bn and US$0.95bn respectively. The other rated banks may count on subordinated loans from the government to the extent of 15% of their charter capital, and only if their shareholders additionally contribute double the government’s injection” so it is Russia’s version of priming the pump.

Sept 30: Russia announces that it will place $50bn of its reserves to the development bank to provide loans to allow debt-laden companies and banks pay off foreign loans that are maturing in coming months.

Sept 18: Government pledged to boost liquidity by more than $100bn

This groups together some of the previously announced capital to the banks including:

a) A total of about $60 b in overnight funds and term deposits for the financial sector including a portion that will be reserved for smaller banks.. A portion of this comes from the government budget.

b) 29.5b previously announced to be given to the big banks – this might include funds for share buybacks

Sep 16: the Government injected $16 billion of one-day funds into the money market to ease the overnight rate (near the double digits) as the Micex crashed 18%, the biggest one day fall (at that point) and the RTS fell 11%.

Sep 4: To stop the rouble falling further, the central bank sold an estimated $4bn in reserves. The central bank has been an active participant in the foreign exchange markets for years to manage the rouble’s peg against the basket.

For more see the FT’s interactive guide to the crisis, though the guide ends September 19, when Russian equities rebounded 25% following major losses earlier in the week.

Where is this money coming from? Some of it likely comes from Russia’s reserves which approached $600 billion in July but are now likely close
r to $550 billion. Some of this was spent to purchase dollars to support the rouble but as significant amount of their loss in value is due to the revaluation of the euro and pound assets the CBR owns which are about 55% of the portfolio). The dollar’s rally has reduced their value in dollar terms. Despite still ample inflows from oil to the stabilization fund, Russia’s reserves are likely to decrease – the $50 billion entrusted to the development bank to backstop Russian financial and non-financial institutions foreign debts, but it is not clear if that has yet been transferred.

Other funds though likely come from various state entities, withheld funds from the budget (perhaps those kept on the sidelines lest their allocation exacerbate inflation). These are likely in roubles.

Earlier this year and last Russia began to be creative about allocating funds, for example transferring funds to the stabilization fund to support intervention in the currency markets or shifting funds from the development bank to provide term deposits for banks, to boost boosting domestic liquidity. Some of the many billions of liquidity provided may use a similar means. But all in all these policies seem likely to cause Russia’s fiscal spending to balloon. But for now they are not tapping into the Reserve or stabilization funds, which reached a new record of over $180 billion at the end of September. Drawing on the funds would likely trigger a ratings downgrade, especially if coupled with the expansionary fiscal policy. All in all, not necessarily a good time for Russia to be introducing its investment strategy for the $40 billion wealth fund. Yet these savings improve Russia’s position – a good thing, since many other risks point to the downside as domestic weaknesses become more visible as the external environment becomes less welcoming.  Today, the IMF suggested that growth might slow to 7% this year (a prediction well in line with consensus and 5.5% in 2009) and given the capital outflows, wealth losses and the potential domestic demand might slow, that could even be optimistic.