2008–2009 Russian financial crisis
Encyclopedia
The 2008–2009 Russian financial crisis, part of the world Economic crisis of 2008, was a crisis in the Russia
n financial markets as well as an economic recession that was compounded by political fears after the war with Georgia and by the plummeting price of Urals heavy crude oil
, which lost more than 70% of its value since its record peak of US$147 on 4 July 2008 before rebounding moderately in 2009. According to the World Bank
, Russia’s strong short-term macroeconomic fundamentals made it better prepared than many emerging economies to deal with the crisis, but its underlying structural weaknesses and high dependence on the price of a single commodity made its impact more pronounced than would otherwise be the case.
In late 2008 during the onset of the crisis, Russian markets plummeted and more than $1 trillion had been wiped off the value of Russia's shares, although Russian stocks rebounded in 2009 becoming the world’s best performers, with the Micex index having more than doubled in value and regaining half its 2008 losses.
As the crisis progressed, Reuters
and the Financial Times
speculated that the crisis would be used to increase the Kremlin's control over key strategic assets in a reverse of the "loans for shares" sales of the 1990s, when the state sold off major assets to the oligarch
s in return for loans. In contrast to this earlier speculation, in September 2009 the Russian government announced plans to sell state energy and transport holdings in order to help plug the budget deficit and to help improve the nation's aging infrastructure. The state earmarked
about 5,500 enterprises for divestment
and plans to sell shares in companies that are already publicly traded, including Rosneft
, the country’s biggest oil producer.
From July 2008 – January 2009, Russia's foreign exchange reserves
(FXR) fell by $210 billion from their peak to $386 billion as the central bank adopted a policy of gradual devaluation to combat the sharp devaluation of the ruble
. The ruble weakened 35% against the dollar from the onset of the crisis in August to January 2009. As the ruble stabilized in January the reserves began to steadily grow again throughout 2009, reaching a year-long high of $452 billion by year's-end.
Russia's economy emerged from recession in the third quarter of 2009 after two quarters of record negative growth. GDP contracted by 7.9% for the whole of 2009, slightly less than the economic ministry's prediction of 8.5%. Experts expect Russia's economy will grow modestly in 2010, with estimates ranging from 3.1% by the Russian economic ministry to 2.5%, 3.6% and 4.9% by the World Bank
, International Monetary Fund
(IMF), and Organisation for Economic Cooperation and Development (OECD) respectively.
's criticism of steel company Mechel
collapsing the company's stock. By September 2008, the RTS stock index plunged almost 54%, making it one of the worst performing markets in the world. Russian involvement in the US subprime mortgage crisis
contributed to the volatility in Russia's financial system. The Russian Central Bank owned US$100 Billion of mortgage-backed securities
of the two American mortgage giants Fannie Mae and Freddie Mac that were taken over by the US government
. This investment most likely will have to be written off.
Many analysts, including Andrei Illarionov, former economic policy adviser to then-President Vladimir Putin, claim that in Russia the crisis in the stock market was deepened dramatically by internal factors, including concerns over state interference in the economy fueled in June by Putin's criticism of Mechel
and the conflict over TNK-BP
, lack of transparency in banking and political risks associated with escalating geopolitical tensions following the 2008 South Ossetia war
in August. Swedish Foreign minister
Carl Bildt
said on 17 September that the current Russian financial crisis is "obviously more worrying" than the ongoing subprime mortgage crisis
in view of the political development in Russia. Furthermore, Russia's overt reliance on the oil and natural gas sector made it particularly vulnerable
According to the Wall Street Journal and Gazeta.ru, as the Russian market declined in September, conspiracy theories circulated in Russia among the leadership that the U.S. government allegedly incited American investors to withdraw their capitals from Russia, punishing Moscow for the recent war in Georgia.
's stock plunged by almost 38 percent after Russia's Prime Minister Vladimir Putin
criticized its CEO Igor Zyuzin
, and accused the company of selling resources to Russia at higher prices than those charged to foreign countries. The comments, which raised fears of another attack similar to that made on Yukos
in 2004, contrasted sharply with previous efforts by President Dmitry Medvedev
to improve Russia's reputation as an investor-friendly country. On the following day, Mechel issued a contrite statement promising full cooperation with federal authorities, while share values rebounded by nearly 15 percent. 28 July presidential aide Arkady Dvorkovich
then sought to restore calm, declaring that all parties would "act in a civilized way," and confirming that Mechel was cooperating with antitrust authorities. Just hours later, however, Putin announced that Mechel had been avoiding taxes, by using foreign subsidiaries to sell its products internationally. His renewed attack caused share prices to tumble once more—this time by almost 33 percent.
On 16 September Russia's most liquid stock exchange MICEX and the dollar-denominated RTS
were suspended trade for one hour after the worst one-day fall in 10 years as Finance Minister Alexei Kudrin
reassured markets there was no "systemic" crisis. Next day, trading was suspended for the second day in succession on Russia's two main stock exchanges (MICEX and RTS) after shares fell dramatically, forcing the Federal Financial Markets Service
to intervene. The simultaneous collapse of money markets prompted reaction from the government and the Central Bank, while Finance Minister Alexey Kudrin sought assurances from U.S. Treasury Secretary Henry Paulson
that the U.S. did not play politics with Russia in the crisis.
The crisis continued on 18 September, as trading was suspended for the third day in succession on Russia's two main stock exchanges amidst fear of financial collapse. News agencies are quoting Russia's finance minister Alexei Kudrin
as saying trading on Russian exchanges will not resume until 19 September 2008. Officials at MICEX stock exchange describe conditions in the Russian markets as "extraordinary" Deputy Finance Minister
Pyotr Kazakevich asserted that "Russia is facing its worst stock market decline in a decade mainly because of a confidence crisis rather than liquidity problems".
6 October the MICEX and RTS
crashed by 18.6% and 19.1% respectively. The losses forced the Federal Financial Markets Service
to suspend the stocks three times. The decreases in other world markets on that day were considerable, but less dramatic than in Russia. Trading on both exchanges was suspended on the next day; Russian companies have augmented in price at London LSE
. On 8 October the MICEX and RTS plunged 14.4% and 11.3% respectively, trading on the markets was halted until 10 October, respectively. However, on 9 October MICEX trading resumed ahead of schedule, and the stock market rose 14.7%. On the next day the regulator, wary of crises in American and Asian markets, decided not to open trading at all.
s was imminent since spring, when Central Bank of Russia warned the public of a gradual contraction in bank lending due to unfolding world liquidity crisis. However, the regulator preferred to combat inflation, raising the refinancing rate and bank reserve contributions
. 1 September hike in reserve rate alone withdrew nearly 100 billion roubles from the money market. The raise coincided with a seasonal peak in tax payments and left the banking system in a worse state of liquidity than that of August 1998. A subsequent drop in rouble-to-dollar exchange rate and dollar-denominated prices of Russian corporate securities forced investors to crowd out
, worsening the positive feedback
loop. The interbank money market
that traditionally relied on Russian corporate stock as a colllateral
for the repurchase agreement
s, immediately imploded in what was called "a crisis of trust" or even "elimination of trust": when the borrowers defaulted on loans, leaving lenders with impaired collateral, other banks stopped lending as a precaution.
Money market crunch passed its first lowest mark 15–17 September. 17 September the government lent the country's three biggest banks, Sberbank
, VTB Bank and Gazprombank
, 1.13 trillion rubles
(US$44 billion) for at least three months to boost liquidity
; the Central Bank lowered the reserve requirement
. This was followed 24 September by Central Bank loans to keep the current accounts afloat and prevent a bank run
. The regulators also raised the cap for deposit insurance
from 400 to 700 thousand roubles (equivalent to 25 thousand dollars). These actions served their short-term purpose but failed to revitalize the money market: no bank was willing to lend for longer than overnight.
17 November MosPrime interbank interest rate on rouble loans reached a record high of 22.67%, indicating another shortage of liquid funds as the bank clients transferred funds overseas or paid taxes due. Rates on six-month US dollar forward contract
s fluctuated at 40–60%, short-term currency swap
s averaged around 80% as the banks anticipated further drop in exchange rates.
and Alrosa
agreed to acquire a 90% stake in KIT Finance.
In the beginning of October Sergei Ignatyev, chairman of the Central Bank, announced imminent bankruptcy of 50 to 70 banks. Actually, in late August – late November the regulator has shut down only nine banks. More smaller banks showing signs of distress are allowed to operate, like the Moscow Mortgage Bank that defaulted on returning individual deposits in November. Regional banks, heavily dependent on individual deposits, were in particular hit. A bank run
registered in Bashkortostan
in November caused local crises. Three of the four worst affected banks were promised rescue by their shareholders or third-party buyers; fate of the fourth one is yet to be decided.
On 18 September, Russian President Dmitry Medvedev
ordered ministers to inject 500 billion roubles of funds from the state budget into the markets and pledged that the financial system would receive "all necessary support". On 7 October, Medvedev announced an additional $36 billion for banks on top of the $150 billion approved in September.
On 29 September, Vladimir Putin
announced a government policy aimed at refinancing Russian corporations that previously relied on foreign loans. Government authorized Vnesheconombank as its principal agent in distributing state loans to these corporations, amounting initially up to 50 billion US dollars, or 8% of Russia's foreign currency assets. At the same time Putin recommended the Central Bank to extend unsecured stabilization loans to Russian banks, which was duly implemented. The policy was immediately dubbed "soft re-nationalisation" and criticized for selective picking of "eligible" borrowers. The 50 billion installment covers only the current portion of 477 billion US dollars owed by Russian corporations to foreign lenders; total assets of the government and the Central Bank combined are estimated at 550 billion US dollars.
On 23 October, Standard & Poor's
changed the long-term outlook on the sovereign credit ratings of Russia from stable to negative, warning of the costs of bailing out troubled banks and a rising risk of a budget deficit in 2009. It also lowered Russia's Transfer and Convertibility (T&C) assessment to BBB+
from A-
. At the same time, the 'BBB+' long-term foreign currency, the 'A-' long-term local currency ratings and the short-term ratings of A-2
were affirmed.
By 13 November, Russian government spending to quench the recession reached 222 billion US dollars, or 13.9% of its GDP; in November the state was spending its reserves at an average 22 billion dollars a week.
On 8 December 2008, Standard & Poor's
additionally lowered Russia's foreign currency credit ratings to BBB
(long term) and A-3
. It also lowered Russia's Transfer and Convertibility (T&C) assessment to BBB
and the long-term local currency assessment to BBB+
. On the other hand, the short-term credit rating in local currency was left intact as A-2. The lowering of credit ratings was caused by the sharp decline of reserves and investment flow. Standard & Poor's also launched a downward revision of Russian municipal and corporate bond ratings.
announced government package of tax reforms. Corporate profit tax rate (24% in 2008) is to be reduced to 20%. Profit tax base will decrease for companies investing in capital assets as the immediately recoverable depreciation allowance is raised from 10% to 30% of the asset cost. There will be no change in value added tax
rates (maximum 18%) in 2009, but the government considered changing VAT accrual rules in favor of the taxpayers. Minister of finance Alexey Kudrin, who resisted tax breaks until September, concurred with Putin's proposal, estimating that they will save the businesses around 500 billion roubles annually.
Earlier in November, Kudrin announced that the state has accepted the fact of a long-term drop in oil prices and that the existing state budget plans will hold unchanged if the oil prices stabilize on 50 dollars per barrel mark. Even with tax breaks effective, Kudrin estimated that the 2009 state budget will break even or, in worst case, bear no more than 1% deficit. The deficit will be covered by Stabilisation Fund, without resorting to borrowing.
In December the government lifted import tariffs on industrial equipment imported by metallurgy, construction, forestry and textile industry, at the same time enforcing increased tariffs on imported cars.
On 15 April 2009, Finance Minister Alexei Kudrin
said the federal budget will show a deficit of 7.4% of GDP in 2009. In comparison, the US expects a budget deficit of 13.5% of GDP, Britain 9.3%, and France 6.6%. According to Kudrin forecast for the 2010 deficit is 5%. Kudrin warned, that Russia must cut down its budget deficit before 2011. "Our vulnerability to the crisis is higher than that of the countries with more diversified economies. This is why 2009 should be a unique year. We must not have a comparable budget deficit in subsequent years. We must work to reduce it to 3% in 2011," he said.
On 25 May 2009, President Dmitry Medvedev said the budget deficit in 2009 will be "at least 7%" of GDP.
, pressed the corporations to reveal their true owners and signed an agreement with the government of Cyprus
(20 November) that may enable inter-government dislosure of ownership records. Cyprus is, nominally, the number one investor in Russia; 99% of RTS
stock trades are arranged between foreign shareholders.
emergency loans to other states, initially contributing one billion US dollar. Earlier, in October, Russian ambassador to Iceland
announces that Iceland will receive a €4 billion loan from Russia to mitigate the 2008–2011 Icelandic financial crisis. The loan will be given across three or four years, and the interest rates will be 30 to 50 points above LIBOR
. Prime minister Geir Haarde
had been investigating the possibility of a loan provided by Russia since the mid-summer. Iceland's Central bank Governor Davíð Oddsson
later clarified that the loan was still being negotiated.
report projected 3% growth for 2009, However, a revised projection issued 30 March 2009 by the World Bank projects a 4.5% decrease for 2009 with unemployment projected to rise to 12% by the end of 2009. The World Bank report expressed concern about the condition of the poor and recommended increases in social support payments such as unemployment payments and child support payments. The report projected a slight rise in the average price of oil during 2010, up to $53 a barrel from the projected average of $45 for 2009.
In the middle of December 2008 Russian officials confirmed that possibility of a recession was inevitable. "Russia is headed for a recession", the country's deputy economy minister, Andrei Klepach
, has said. Asked whether Russia would have a recession, he said: "It's started already. I'm afraid it will not be over in the next two quarters. ... A major drop began in October and there will also be drops in November–December," he said, according to official reports. Recessions are normally declared after two quarters of negative growth. He also said that full-year economic growth for 2008 would be lower than the 6.8% previously forecast.
laid off 3,000 workers (10% of its Urals staff) and reduced output by 15% on 7 October, another layoff of 1,300 was announced in early November. Severstal
reduced domestic production by 25%; its US and Italian production dropped by 30%. Evraz Group
, employer of 40 thousands workers in Kemerovo Oblast
, was reported negotiating layoffs with the unions and regional government since 30 October. The company, specializing in construction-grade rolled steel, was inherently in worse position than other Russian steel mills. 13 November Evraz announced that, instead of layoffs, it will decrease workers' wages by a third. Some of Evraz facilities were converted to a four-day working week; the company reduced output to an estimated 50–60% of its capacity.
On 18 November Goskomstat
insider reported an unprecedented drop in industrial prices – minus 6.6% monthly, following a 0.8% drop in September (the agency itself delayed its regular monthly report). Most of the losses concentrate in raw material industries; automobile and tool-making industries dropped only 0.4%. In two months, gasoline and diesel oil wholesale prices dropped by 12.8% and 16.5%. The worst price fall hit the steel industry: pig iron an ferric alloys dropped 21.7% in October after a 8.9% drop in September. Prices on aluminum and nickel are down to break-even
point. The decline is sufficient to indicate a recession
.
In November the industry relied on government funds distributed through Vneshtorgbank
loans. VTB issued a 10 billion roubles emergency loan to Evraz to finance its current tax payments; a similar 5 billion loan was issued to OAO TMK
. Magnitka
was reported "in the line" for VTB financing. The industry continued to implode, and on 14 and 18 November Novolipetsk Steel
shut down two of its five blast furnace
s, reducing its pig iron
capacity by 2.5 million metric tons, or 27%. On the same day Novolipetsk Steel denied steel shipments to GAZ
due to automobile maker's default on payments.
described "Russia's booming car market" as a place where "you just need someone to count the money". In November the market slowed to its lowest since January 2007. AC Nielsen linked the market drop to a collapse in auto loan programs and general uncertainty among consumers, and predicted that unless auto loans recover, the market will slide back into 1990s. The government supported domestic auto makers by an increase in tariff
s on imports, leading to an expected 7.5–8% price increase for imported cars.
GAZ
and KAMAZ
were the first auto makers to declare production cuts in September–October 2008. GAZ
truck production has decreased by 23.4% in September 2008; in October the company announced week-long shutdowns of the main assembly line to meet decrease in demand for its most successful line, the GAZelle
truck. KAMAZ
, the target of acquisition by Daimler AG since July, has been reporting financial difficulties since September. In October KAMAZ reduced working hours by a third, from six-day to four-day working week. KAMAZ requested a 15 billion rouble state-backed loan and took a private loan from Citigroup
at 9% over prime rate
; in December Daimler AG acquired the first 10% in KAMAZ stock, citing "perfect storm" as a good time acquisition.
AvtoVAZ
disclosed emergency measures on 16 October, when Igor Sechin
held an industry-wide anti-crisis brainstorming session in Togliatti
. AvtoVAZ
reported a stockpile of 100 thousands unsold cars (two months' output). The company requested government assistance of 1 billion US Dollars arranged through a Vneshtorgbank
loan. Unlike other major borrowers who used VTB loans to substitute foreign capital, AvtoVAZ loan was intended solely to pay current expenses.
AvtoFramos, Moscow-based manufacturer of Renault Logan, has confirmed that instead of a planned weekly New Year holiday, the plant will stop for a month, 12 December 2008 to 12 January 2009. Trade unions asserted that AvroFramos has practiced short-time stoppages in November; plant administration refuted these statements. According to the unions, unsold stock reached 8 thousand cars, a month's output of the plant.
Amtel-Vredestein
has closed two of its tire
plants due to cash flow problems. On 2 December media announced closure of Bor Glass Works, the principal supplier of auto glass, but the news was soon refuted as false by the plant administration.
construction executive described regional business prospects as "very bad", notably the fact that "there is no single bank for today which grants mortgage loan
s... Construction industry will not survive under such terms."
27 October Vladimir Putin urged the government agencies to increase state purchases of road and housing construction services, arguing that the state must capitalize on the decrease in prices of raw materials. The state allocated 50 billion roubles to buy ready-to-occupy urban housing from cash-strapped developers. Putin emphasized that the new contracts must be struck on new, decreased, price terms – estimated to be 20–30% cheaper than in spring. Strabag
executive estimated that in 2009 construction costs will decrease a further 30%. In November Moscow city government has been successfully pressing local developers for a 25% discount against October auction
prices; the only developer who attempted to sue the city for a breach of contract withdrew their lawsuit and accepted the government terms. City government also pulled out of the 118-floor Russia Tower
project, which was immediately suspended by its developer, citing "credit crunch".
and the City of Moscow), declared a ten day shutdown on 24 November. UPM-Kymmene Oyj
anticipates at least a 30–40% decrease in output compared to 2008. In June 2010, President Dmitry Medvedev visited Silicon Valley in San Jose, California in order to cultivate ideas of how to develop Russia as a major research center. Skolkovo, a mid-sized city near Moscow, is the proposed location for this Russian Silicon Valley, and will have its own tax structure. Yet, Medvedev has been criticized by opposition politicians for deflecting attention away from the struggling economy and corruption.
, a Krasnoyarsk
-based airline with a controlling state interest, was grounded by the fuel suppliers' refusal to extend credit to the company that defaulted on payments. Other members of AiRUnion
consortium, notably Dalavia, also folded in August. Thousands of passengers were stranded in airports; flight delays and cancellations became a national agenda. Government action focused on setting the cap on jet fuel
prices and restructuring its assets into a new company managed by Rostechnologii, a newly-formed state conglomerate
. Ministry of Transportation distributed the licenses to fly former KrasAir routes to other companies. KrasAir also defaulted on payments to its staff, and on 27 October a strike action
, coupled with fuel suppliers' denial of service, finally ruined the airline. Dalavia lost its license earlier in October. The collapse of KrasAir also threatened Sky Express
, Russia's first low cost carrier co-owned by the EBRD and former manager of KrasAir. 22 October the assets of bankrupt KrasAir
, Domodedovo Airlines
, Samara Airlines
and Atlant-Soyuz Airlines
were consolidated in a new company, Rosavia, co-financed by the City of Moscow and Rostekhnologii. Rossiya
, Orenair, Kavminvodyavia
, Vladivostok Air, Dalavia and Saravia
were originally planned to join this proposed airline holding company, too, which would have made Rosavia the largest Russian airline by fleet size. Following a 20 percent drop of domestic passenger numbers in Russia per month, the federal government scrapped all plans concerning the new airline on 5 March 2009
authorized a state export subsidy of 40 US dollars per metric ton. This, according to the minister of agriculture, is sufficient to maintain exports at 20–25 million metric tons. The food industry is, however, locked between high costs of farm produce and tight price and credit terms dictated by retail chains. Food industry executives anticipate that the chains will eventually lose part of their clients to street markets, as the suppliers are forced to develop this independent sales channel.
Domestic retail chains, heavily leveraged
, were experiencing liquidity crisis
at least since April 2008. The first chain to go bankrupt in May 2008, Grossmart (190 stores in Moscow region), had a particularly high debt-to-EBITDA
ratio of 6 to 1. Arbat Prestige, subject to government attacks since 2007, defaulted on its bonds in June. In November 2008 nine leading food retail chains (out of nearly 300) received access to government-backed financing. Nevertheless, retailers are pressing food suppliers for longer credit terms or bigger cash discounts, demanding up to 50% price cut for cash payment. Suppliers, in a mirror move, raised "regular" credit prices by 20–60%. Rather than submit to the chains' demands, they simply refuse to sell; visible depletion of stocks has affected only a few affected chains.
survey of 113 clients that leaked into Russian press in November summarized their losses at 8% of managerial and 6% of low-level jobs by end of October. All companies in the survey practiced some sort of reducing labor costs. One company in four practiced unpaid "vacations"; 8% of clients settled for reduced working hours. Federal Migratory Service announced in November that 1123 Russian companies reported upcoming layoffs of 45 thousand.
Most layoffs were reported in metallurgy and financial services: 20% in Uralsib
, 1000 in Vneshtorgbank
's VTB24 retail division. 1 December Vedomosti
reported upcoming 40% cuts in MDM Bank
and 80% in IFD Kapital. Sberbank
endorsed a long-term program to reduce headcount by 25% in 2014. In telecommunications, Sitronics
laid off up to 10% in all business units; in audit services, Deloitte Touche Tohmatsu
reduced number of partners in its Russian division by 17 out of 180. Vedomosti
has set up a private "layoff newsreel" syndicating independent reports of job cuts, yet as at 7 December 2008, there are no reliable nation-wide statistics on white-collar unemployment, which usually escapes official unemployment record.
By late November, Kremlin First Deputy Chief of Staff, Vladislav Surkov
, was warning that the middle classes should be defended from poverty during the crisis. He called for swift measures to protect the middle class from layoffs and to support consumption. "If the 1980s were the times of the intellectuals and the 1990s were the times of the oligarchs then the 00s can be seen as the epoch of the middle classes,' Surkov said in a speech published on the Web site of the ruling United Russia party ... The main task of the state during the slump must become the preservation of the middle class, the defence of the middle class from the waves of poverty and confusion that are coming from the West," he said.
According to official statements released 9 December, rate of unemployment growth peaked in the middle of November and slowed down in subsequent weeks. In the week ending 3 December overall unemployment grew by 1.6% to 1.315 million people, following a 2.3% increase in the preceding week. The state also reported an increase in unpaid vacations and reduced working week employees to 149.3 thousands. The number increased by 84% in a single week ending 3 December. The trade unions anticipate that official unemployment will peak at around 2 million people in 2009, when hidden forms of unemployment become visible to statisticians. Yet on 12 December Putin announced completely different unemployment numbers – 4.6 million in October.
In February 2009 the unemployment rate peaked at a seven-year high of 9.4%, then began to steadily decline, falling to 7.7% as of October.
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
n financial markets as well as an economic recession that was compounded by political fears after the war with Georgia and by the plummeting price of Urals heavy crude oil
Price of petroleum
The price of petroleum as quoted in news generally refers to the spot price per barrel of either WTI/light crude as traded on the New York Mercantile Exchange for delivery at Cushing, Oklahoma, or of Brent as traded on the Intercontinental Exchange for delivery at Sullom Voe.The price...
, which lost more than 70% of its value since its record peak of US$147 on 4 July 2008 before rebounding moderately in 2009. According to the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
, Russia’s strong short-term macroeconomic fundamentals made it better prepared than many emerging economies to deal with the crisis, but its underlying structural weaknesses and high dependence on the price of a single commodity made its impact more pronounced than would otherwise be the case.
In late 2008 during the onset of the crisis, Russian markets plummeted and more than $1 trillion had been wiped off the value of Russia's shares, although Russian stocks rebounded in 2009 becoming the world’s best performers, with the Micex index having more than doubled in value and regaining half its 2008 losses.
As the crisis progressed, Reuters
Reuters
Reuters is a news agency headquartered in New York City. Until 2008 the Reuters news agency formed part of a British independent company, Reuters Group plc, which was also a provider of financial market data...
and the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
speculated that the crisis would be used to increase the Kremlin's control over key strategic assets in a reverse of the "loans for shares" sales of the 1990s, when the state sold off major assets to the oligarch
Business oligarch
Business oligarch is a near-synonym of the term "business magnate", borrowed by the English speaking and western media from post-Soviet parlance to describe the huge, fast-acquired wealth of some businessmen of the former Soviet republics during the privatization in Russia and other post-Soviet...
s in return for loans. In contrast to this earlier speculation, in September 2009 the Russian government announced plans to sell state energy and transport holdings in order to help plug the budget deficit and to help improve the nation's aging infrastructure. The state earmarked
Earmark (politics)
In United States politics, an earmark is a legislative provision that directs approved funds to be spent on specific projects, or that directs specific exemptions from taxes or mandated fees...
about 5,500 enterprises for divestment
Divestment
In finance and economics, divestment or divestiture is the reduction of some kind of asset for either financial or ethical objectives or sale of an existing business by a firm...
and plans to sell shares in companies that are already publicly traded, including Rosneft
Rosneft
Rosneft is an integrated oil company majority owned by the Government of Russia. Rosneft is headquartered in Moscow’s Balchug district near the Kremlin, across the Moskva river...
, the country’s biggest oil producer.
From July 2008 – January 2009, Russia's foreign exchange reserves
Foreign exchange reserves
Foreign-exchange reserves in a strict sense are 'only' the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, Special Drawing Rights and International Monetary Fund reserve positions...
(FXR) fell by $210 billion from their peak to $386 billion as the central bank adopted a policy of gradual devaluation to combat the sharp devaluation of the ruble
Russian ruble
The ruble or rouble is the currency of the Russian Federation and the two partially recognized republics of Abkhazia and South Ossetia. Formerly, the ruble was also the currency of the Russian Empire and the Soviet Union prior to their breakups. Belarus and Transnistria also use currencies with...
. The ruble weakened 35% against the dollar from the onset of the crisis in August to January 2009. As the ruble stabilized in January the reserves began to steadily grow again throughout 2009, reaching a year-long high of $452 billion by year's-end.
Russia's economy emerged from recession in the third quarter of 2009 after two quarters of record negative growth. GDP contracted by 7.9% for the whole of 2009, slightly less than the economic ministry's prediction of 8.5%. Experts expect Russia's economy will grow modestly in 2010, with estimates ranging from 3.1% by the Russian economic ministry to 2.5%, 3.6% and 4.9% by the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
, International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF), and Organisation for Economic Cooperation and Development (OECD) respectively.
Background
Russia is a major exporter of commodities such as oil and metals, so its economy has been hit hard by the decline in the price of many commodities. Russian stock market declined significantly. Foreign investors have pulled billions of dollars out of Russia on concerns over escalating geopolitical tensions with the West following the military conflict between Georgia and Russia, as well as concerns about state interference in the economy. Those concerns were underscored in July by Prime Minister Vladimir PutinVladimir Putin
Vladimir Vladimirovich Putin served as the second President of the Russian Federation and is the current Prime Minister of Russia, as well as chairman of United Russia and Chairman of the Council of Ministers of the Union of Russia and Belarus. He became acting President on 31 December 1999, when...
's criticism of steel company Mechel
Mechel
Mechel is one of Russia’s leading mining and metallurgical companies, producing coal, iron ore, nickel steel, rolled steel products, hardware, heat and electric power. Headquartered in Moscow, the company operates facilities in Russia, Romania, Lithuania, Kazakhstan, Bulgaria, and the United...
collapsing the company's stock. By September 2008, the RTS stock index plunged almost 54%, making it one of the worst performing markets in the world. Russian involvement in the US subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
contributed to the volatility in Russia's financial system. The Russian Central Bank owned US$100 Billion of mortgage-backed securities
Mortgage-backed security
A mortgage-backed security is an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization.-Securitization:...
of the two American mortgage giants Fannie Mae and Freddie Mac that were taken over by the US government
Federal takeover of Fannie Mae and Freddie Mac
The federal takeover of Fannie Mae and Freddie Mac refers to the placing into conservatorship of government sponsored enterprises Fannie Mae and Freddie Mac by the U.S. Treasury in September 2008. It was one financial event among many in the ongoing subprime mortgage crisis.On September 6, 2008,...
. This investment most likely will have to be written off.
Many analysts, including Andrei Illarionov, former economic policy adviser to then-President Vladimir Putin, claim that in Russia the crisis in the stock market was deepened dramatically by internal factors, including concerns over state interference in the economy fueled in June by Putin's criticism of Mechel
Mechel
Mechel is one of Russia’s leading mining and metallurgical companies, producing coal, iron ore, nickel steel, rolled steel products, hardware, heat and electric power. Headquartered in Moscow, the company operates facilities in Russia, Romania, Lithuania, Kazakhstan, Bulgaria, and the United...
and the conflict over TNK-BP
TNK-BP
TNK-BP is a major vertically integrated Russian oil company. It is Russia's third largest oil producer and among the ten largest private oil companies in the world. TNK-BP is Russia's third largest oil company in terms of reserves and crude oil production...
, lack of transparency in banking and political risks associated with escalating geopolitical tensions following the 2008 South Ossetia war
2008 South Ossetia war
The 2008 South Ossetia War or Russo-Georgian War was an armed conflict in August 2008 between Georgia on one side, and Russia and separatist governments of South Ossetia and Abkhazia on the other....
in August. Swedish Foreign minister
Minister for Foreign Affairs (Sweden)
The Minister for Foreign Affairs is the foreign minister of Sweden and the head of the Ministry for Foreign Affairs.The office was instituted in 1809 as a result of the constitutional Instrument of Government promulgated in the same year. Until 1876 the office was called Prime Minister for Foreign...
Carl Bildt
Carl Bildt
, Honorary KCMG is a Swedish politician, diplomat and nobleman. Formerly Prime Minister of Sweden from 1991 to 1994 and leader of the liberal conservative Moderate Party from 1986 to 1999, Bildt has served as Swedish Minister for Foreign Affairs since 6 October 2006...
said on 17 September that the current Russian financial crisis is "obviously more worrying" than the ongoing subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
in view of the political development in Russia. Furthermore, Russia's overt reliance on the oil and natural gas sector made it particularly vulnerable
According to the Wall Street Journal and Gazeta.ru, as the Russian market declined in September, conspiracy theories circulated in Russia among the leadership that the U.S. government allegedly incited American investors to withdraw their capitals from Russia, punishing Moscow for the recent war in Georgia.
Financial markets
Stock markets
24 July 2008, MechelMechel
Mechel is one of Russia’s leading mining and metallurgical companies, producing coal, iron ore, nickel steel, rolled steel products, hardware, heat and electric power. Headquartered in Moscow, the company operates facilities in Russia, Romania, Lithuania, Kazakhstan, Bulgaria, and the United...
's stock plunged by almost 38 percent after Russia's Prime Minister Vladimir Putin
Vladimir Putin
Vladimir Vladimirovich Putin served as the second President of the Russian Federation and is the current Prime Minister of Russia, as well as chairman of United Russia and Chairman of the Council of Ministers of the Union of Russia and Belarus. He became acting President on 31 December 1999, when...
criticized its CEO Igor Zyuzin
Igor Zyuzin
Zyuzin, Igor Vladimirovich is a major Russian businessman, Managing Director and a major shareholder of mining and metallurgical holding company "Mechel". According to Forbes magazine on March 8, 2008 his personal fortune estimated at $ 13.1 billion. According to Forbes magazine on March 11, 2009...
, and accused the company of selling resources to Russia at higher prices than those charged to foreign countries. The comments, which raised fears of another attack similar to that made on Yukos
YUKOS
OJSC "Yukos Oil Company" was a petroleum company in Russia which, until 2003, was controlled by Russian oligarch Mikhail Khodorkovsky and a number of other prominent Russian businessmen. After Yukos was bankrupted, Khodorkovsky was convicted and sent to prison.Yukos headquarters was located in...
in 2004, contrasted sharply with previous efforts by President Dmitry Medvedev
Dmitry Medvedev
Dmitry Anatolyevich Medvedev is the third President of the Russian Federation.Born to a family of academics, Medvedev graduated from the Law Department of Leningrad State University in 1987. He defended his dissertation in 1990 and worked as a docent at his alma mater, now renamed to Saint...
to improve Russia's reputation as an investor-friendly country. On the following day, Mechel issued a contrite statement promising full cooperation with federal authorities, while share values rebounded by nearly 15 percent. 28 July presidential aide Arkady Dvorkovich
Arkady Dvorkovich
Arkady Vladimirovich Dvorkovich is an official of the Russian Chess Federation. Dvorkovich favors his opponent, Kirsan Ilyumzhinov, who is running for re-election of FIDE....
then sought to restore calm, declaring that all parties would "act in a civilized way," and confirming that Mechel was cooperating with antitrust authorities. Just hours later, however, Putin announced that Mechel had been avoiding taxes, by using foreign subsidiaries to sell its products internationally. His renewed attack caused share prices to tumble once more—this time by almost 33 percent.
On 16 September Russia's most liquid stock exchange MICEX and the dollar-denominated RTS
Russian Trading System
The Russian Trading System is a stock market established in 1995 in Moscow, consolidating various regional trading floors into one exchange. Originally RTS was modelled on NASDAQ's trading and settlement software; in 1998 the exchange went on line with its own in-house system...
were suspended trade for one hour after the worst one-day fall in 10 years as Finance Minister Alexei Kudrin
Alexei Kudrin
Alexei Leonidovich Kudrin was the Minister of Finance and Deputy Prime Minister of Russia from 18 May 2000 to 26 September 2011. After graduating with degrees in finance and economics, Kudrin worked in the administration of Saint Petersburg's liberal Mayor Anatoly Sobchak. In 1996 he started...
reassured markets there was no "systemic" crisis. Next day, trading was suspended for the second day in succession on Russia's two main stock exchanges (MICEX and RTS) after shares fell dramatically, forcing the Federal Financial Markets Service
Federal Financial Markets Service
The Federal Financial Markets Service is a Russian federal executive body which regulates Russian financial markets including securities issuance and trading and supervision of exchanges, issuers, professional market participants and their Self-Regulatory Organisations; the Russian Federation...
to intervene. The simultaneous collapse of money markets prompted reaction from the government and the Central Bank, while Finance Minister Alexey Kudrin sought assurances from U.S. Treasury Secretary Henry Paulson
Henry Paulson
Henry Merritt "Hank" Paulson, Jr. is an American banker who served as the 74th United States Secretary of the Treasury. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs.-Early life and family:...
that the U.S. did not play politics with Russia in the crisis.
The crisis continued on 18 September, as trading was suspended for the third day in succession on Russia's two main stock exchanges amidst fear of financial collapse. News agencies are quoting Russia's finance minister Alexei Kudrin
Alexei Kudrin
Alexei Leonidovich Kudrin was the Minister of Finance and Deputy Prime Minister of Russia from 18 May 2000 to 26 September 2011. After graduating with degrees in finance and economics, Kudrin worked in the administration of Saint Petersburg's liberal Mayor Anatoly Sobchak. In 1996 he started...
as saying trading on Russian exchanges will not resume until 19 September 2008. Officials at MICEX stock exchange describe conditions in the Russian markets as "extraordinary" Deputy Finance Minister
Finance minister
The finance minister is a cabinet position in a government.A minister of finance has many different jobs in a government. He or she helps form the government budget, stimulate the economy, and control finances...
Pyotr Kazakevich asserted that "Russia is facing its worst stock market decline in a decade mainly because of a confidence crisis rather than liquidity problems".
6 October the MICEX and RTS
Russian Trading System
The Russian Trading System is a stock market established in 1995 in Moscow, consolidating various regional trading floors into one exchange. Originally RTS was modelled on NASDAQ's trading and settlement software; in 1998 the exchange went on line with its own in-house system...
crashed by 18.6% and 19.1% respectively. The losses forced the Federal Financial Markets Service
Federal Financial Markets Service
The Federal Financial Markets Service is a Russian federal executive body which regulates Russian financial markets including securities issuance and trading and supervision of exchanges, issuers, professional market participants and their Self-Regulatory Organisations; the Russian Federation...
to suspend the stocks three times. The decreases in other world markets on that day were considerable, but less dramatic than in Russia. Trading on both exchanges was suspended on the next day; Russian companies have augmented in price at London LSE
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
. On 8 October the MICEX and RTS plunged 14.4% and 11.3% respectively, trading on the markets was halted until 10 October, respectively. However, on 9 October MICEX trading resumed ahead of schedule, and the stock market rose 14.7%. On the next day the regulator, wary of crises in American and Asian markets, decided not to open trading at all.
Money markets
The crisis in money marketMoney market
The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
s was imminent since spring, when Central Bank of Russia warned the public of a gradual contraction in bank lending due to unfolding world liquidity crisis. However, the regulator preferred to combat inflation, raising the refinancing rate and bank reserve contributions
Bank reserves
Bank reserves are banks' holdings of deposits in accounts with their central bank , plus currency that is physically held in the bank's vault . The central banks of some nations set minimum reserve requirements...
. 1 September hike in reserve rate alone withdrew nearly 100 billion roubles from the money market. The raise coincided with a seasonal peak in tax payments and left the banking system in a worse state of liquidity than that of August 1998. A subsequent drop in rouble-to-dollar exchange rate and dollar-denominated prices of Russian corporate securities forced investors to crowd out
Crowding out (economics)
In economics, crowding out occurs when Expansionary Fiscal Policy causes interest rates to rise, thereby reducing private spending. That means increase in government spending crowds out investment spending....
, worsening the positive feedback
Positive feedback
Positive feedback is a process in which the effects of a small disturbance on a system include an increase in the magnitude of the perturbation. That is, A produces more of B which in turn produces more of A. In contrast, a system that responds to a perturbation in a way that reduces its effect is...
loop. The interbank money market
Money market
The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
that traditionally relied on Russian corporate stock as a colllateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
for the repurchase agreement
Repurchase agreement
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively...
s, immediately imploded in what was called "a crisis of trust" or even "elimination of trust": when the borrowers defaulted on loans, leaving lenders with impaired collateral, other banks stopped lending as a precaution.
Money market crunch passed its first lowest mark 15–17 September. 17 September the government lent the country's three biggest banks, Sberbank
Sberbank
Sberbank Rossii is the largest bank in Russia and Eastern Europe. The company's headquarters are in Moscow and its history goes back to Cancrin's financial reform of 1841...
, VTB Bank and Gazprombank
Gazprombank
Gazprombank is the largest Russian non-state owned bank, which is among the three largest banks in Russia. It is a joint stock bank founded in 1990. The bank is owned by the Russian gas company Gazprom, which controls 62.59% of shares directly and also retains shares through its subsidiaries...
, 1.13 trillion rubles
Russian ruble
The ruble or rouble is the currency of the Russian Federation and the two partially recognized republics of Abkhazia and South Ossetia. Formerly, the ruble was also the currency of the Russian Empire and the Soviet Union prior to their breakups. Belarus and Transnistria also use currencies with...
(US$44 billion) for at least three months to boost liquidity
Market liquidity
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
; the Central Bank lowered the reserve requirement
Reserve requirement
The reserve requirement is a central bank regulation that sets the minimum reserves each commercial bank must hold of customer deposits and notes...
. This was followed 24 September by Central Bank loans to keep the current accounts afloat and prevent a bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
. The regulators also raised the cap for deposit insurance
Deposit insurance
Explicit deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due...
from 400 to 700 thousand roubles (equivalent to 25 thousand dollars). These actions served their short-term purpose but failed to revitalize the money market: no bank was willing to lend for longer than overnight.
17 November MosPrime interbank interest rate on rouble loans reached a record high of 22.67%, indicating another shortage of liquid funds as the bank clients transferred funds overseas or paid taxes due. Rates on six-month US dollar forward contract
Forward contract
In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a...
s fluctuated at 40–60%, short-term currency swap
Currency swap
A currency swap is a foreign-exchange agreement between two parties to exchange aspects of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency; see foreign exchange derivative. Currency swaps are motivated by comparative advantage...
s averaged around 80% as the banks anticipated further drop in exchange rates.
Bank failures
On 15 September the KIT Finance brokerage failed to pay off its debt, signalling problems in Russia's financial sector. On 8 October the Russian RailwaysRussian Railways
The Russian Railways , is the government owned national rail carrier of the Russian Federation, headquartered in Moscow. The Russian Railways operate over of common carrier routes as well as a few hundred kilometers of industrial routes, making it the second largest network in the world exceeded...
and Alrosa
Alrosa
ZAO ALROSA , is Russia's largest diamond company. Alrosa is engaged in the exploration, mining, manufacture and sale of diamonds. The company's operations are located primarily in the Sakha Republic/Yakutsk region. Alrosa accounts for approximately 25% of the world's rough diamond supply and 97%...
agreed to acquire a 90% stake in KIT Finance.
In the beginning of October Sergei Ignatyev, chairman of the Central Bank, announced imminent bankruptcy of 50 to 70 banks. Actually, in late August – late November the regulator has shut down only nine banks. More smaller banks showing signs of distress are allowed to operate, like the Moscow Mortgage Bank that defaulted on returning individual deposits in November. Regional banks, heavily dependent on individual deposits, were in particular hit. A bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
registered in Bashkortostan
Bashkortostan
The Republic of Bashkortostan , also known as Bashkiria is a federal subject of Russia . It is located between the Volga River and the Ural Mountains. Its capital is the city of Ufa...
in November caused local crises. Three of the four worst affected banks were promised rescue by their shareholders or third-party buyers; fate of the fourth one is yet to be decided.
Refinancing foreign capital
Dmitry Medvedev
Dmitry Anatolyevich Medvedev is the third President of the Russian Federation.Born to a family of academics, Medvedev graduated from the Law Department of Leningrad State University in 1987. He defended his dissertation in 1990 and worked as a docent at his alma mater, now renamed to Saint...
ordered ministers to inject 500 billion roubles of funds from the state budget into the markets and pledged that the financial system would receive "all necessary support". On 7 October, Medvedev announced an additional $36 billion for banks on top of the $150 billion approved in September.
On 29 September, Vladimir Putin
Vladimir Putin
Vladimir Vladimirovich Putin served as the second President of the Russian Federation and is the current Prime Minister of Russia, as well as chairman of United Russia and Chairman of the Council of Ministers of the Union of Russia and Belarus. He became acting President on 31 December 1999, when...
announced a government policy aimed at refinancing Russian corporations that previously relied on foreign loans. Government authorized Vnesheconombank as its principal agent in distributing state loans to these corporations, amounting initially up to 50 billion US dollars, or 8% of Russia's foreign currency assets. At the same time Putin recommended the Central Bank to extend unsecured stabilization loans to Russian banks, which was duly implemented. The policy was immediately dubbed "soft re-nationalisation" and criticized for selective picking of "eligible" borrowers. The 50 billion installment covers only the current portion of 477 billion US dollars owed by Russian corporations to foreign lenders; total assets of the government and the Central Bank combined are estimated at 550 billion US dollars.
On 23 October, Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
changed the long-term outlook on the sovereign credit ratings of Russia from stable to negative, warning of the costs of bailing out troubled banks and a rising risk of a budget deficit in 2009. It also lowered Russia's Transfer and Convertibility (T&C) assessment to BBB+
Bond credit rating
In investment, the bond credit rating assesses the credit worthiness of a corporation's or government debt issues. It is analogous to credit ratings for individuals.-Table:...
from A-
Bond credit rating
In investment, the bond credit rating assesses the credit worthiness of a corporation's or government debt issues. It is analogous to credit ratings for individuals.-Table:...
. At the same time, the 'BBB+' long-term foreign currency, the 'A-' long-term local currency ratings and the short-term ratings of A-2
Bond credit rating
In investment, the bond credit rating assesses the credit worthiness of a corporation's or government debt issues. It is analogous to credit ratings for individuals.-Table:...
were affirmed.
By 13 November, Russian government spending to quench the recession reached 222 billion US dollars, or 13.9% of its GDP; in November the state was spending its reserves at an average 22 billion dollars a week.
On 8 December 2008, Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
additionally lowered Russia's foreign currency credit ratings to BBB
Bond credit rating
In investment, the bond credit rating assesses the credit worthiness of a corporation's or government debt issues. It is analogous to credit ratings for individuals.-Table:...
(long term) and A-3
Bond credit rating
In investment, the bond credit rating assesses the credit worthiness of a corporation's or government debt issues. It is analogous to credit ratings for individuals.-Table:...
. It also lowered Russia's Transfer and Convertibility (T&C) assessment to BBB
Bond credit rating
In investment, the bond credit rating assesses the credit worthiness of a corporation's or government debt issues. It is analogous to credit ratings for individuals.-Table:...
and the long-term local currency assessment to BBB+
Bond credit rating
In investment, the bond credit rating assesses the credit worthiness of a corporation's or government debt issues. It is analogous to credit ratings for individuals.-Table:...
. On the other hand, the short-term credit rating in local currency was left intact as A-2. The lowering of credit ratings was caused by the sharp decline of reserves and investment flow. Standard & Poor's also launched a downward revision of Russian municipal and corporate bond ratings.
Tax and state budget policy
20 November Vladimir PutinVladimir Putin
Vladimir Vladimirovich Putin served as the second President of the Russian Federation and is the current Prime Minister of Russia, as well as chairman of United Russia and Chairman of the Council of Ministers of the Union of Russia and Belarus. He became acting President on 31 December 1999, when...
announced government package of tax reforms. Corporate profit tax rate (24% in 2008) is to be reduced to 20%. Profit tax base will decrease for companies investing in capital assets as the immediately recoverable depreciation allowance is raised from 10% to 30% of the asset cost. There will be no change in value added tax
Value added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
rates (maximum 18%) in 2009, but the government considered changing VAT accrual rules in favor of the taxpayers. Minister of finance Alexey Kudrin, who resisted tax breaks until September, concurred with Putin's proposal, estimating that they will save the businesses around 500 billion roubles annually.
Earlier in November, Kudrin announced that the state has accepted the fact of a long-term drop in oil prices and that the existing state budget plans will hold unchanged if the oil prices stabilize on 50 dollars per barrel mark. Even with tax breaks effective, Kudrin estimated that the 2009 state budget will break even or, in worst case, bear no more than 1% deficit. The deficit will be covered by Stabilisation Fund, without resorting to borrowing.
In December the government lifted import tariffs on industrial equipment imported by metallurgy, construction, forestry and textile industry, at the same time enforcing increased tariffs on imported cars.
On 15 April 2009, Finance Minister Alexei Kudrin
Alexei Kudrin
Alexei Leonidovich Kudrin was the Minister of Finance and Deputy Prime Minister of Russia from 18 May 2000 to 26 September 2011. After graduating with degrees in finance and economics, Kudrin worked in the administration of Saint Petersburg's liberal Mayor Anatoly Sobchak. In 1996 he started...
said the federal budget will show a deficit of 7.4% of GDP in 2009. In comparison, the US expects a budget deficit of 13.5% of GDP, Britain 9.3%, and France 6.6%. According to Kudrin forecast for the 2010 deficit is 5%. Kudrin warned, that Russia must cut down its budget deficit before 2011. "Our vulnerability to the crisis is higher than that of the countries with more diversified economies. This is why 2009 should be a unique year. We must not have a comparable budget deficit in subsequent years. We must work to reduce it to 3% in 2011," he said.
On 25 May 2009, President Dmitry Medvedev said the budget deficit in 2009 will be "at least 7%" of GDP.
Corporate governance
Federal Financial Monitoring Service of Russia, the agency in charge of domestic stock markets and corporate governanceCorporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
, pressed the corporations to reveal their true owners and signed an agreement with the government of Cyprus
Cyprus
Cyprus , officially the Republic of Cyprus , is a Eurasian island country, member of the European Union, in the Eastern Mediterranean, east of Greece, south of Turkey, west of Syria and north of Egypt. It is the third largest island in the Mediterranean Sea.The earliest known human activity on the...
(20 November) that may enable inter-government dislosure of ownership records. Cyprus is, nominally, the number one investor in Russia; 99% of RTS
Russian Trading System
The Russian Trading System is a stock market established in 1995 in Moscow, consolidating various regional trading floors into one exchange. Originally RTS was modelled on NASDAQ's trading and settlement software; in 1998 the exchange went on line with its own in-house system...
stock trades are arranged between foreign shareholders.
International cooperation
Russia has agreed to co-finance International Monetary FundInternational Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
emergency loans to other states, initially contributing one billion US dollar. Earlier, in October, Russian ambassador to Iceland
Iceland
Iceland , described as the Republic of Iceland, is a Nordic and European island country in the North Atlantic Ocean, on the Mid-Atlantic Ridge. Iceland also refers to the main island of the country, which contains almost all the population and almost all the land area. The country has a population...
announces that Iceland will receive a €4 billion loan from Russia to mitigate the 2008–2011 Icelandic financial crisis. The loan will be given across three or four years, and the interest rates will be 30 to 50 points above LIBOR
London Interbank Offered Rate
The LIBOR rate is the average interest rate that leading banks in London charge when lending to other banks. It is an acronym for London Interbank Offered Rate Banks borrow money for one day, one month, two months, six months, one year etc. and they pay interest to their lenders based on...
. Prime minister Geir Haarde
Geir Haarde
Geir Hilmar Haarde was Prime Minister of Iceland from 15 June 2006 to 1 February 2009 and Chairman of the Icelandic Independence Party from 2005 to 2009. Geir initially led a coalition between his party and the Progressive Party...
had been investigating the possibility of a loan provided by Russia since the mid-summer. Iceland's Central bank Governor Davíð Oddsson
Davíð Oddsson
Davíð Oddsson is an Icelandic politician and the longest-serving Prime Minister of Iceland, holding office from 1991 to 2004. He also served as Foreign Minister from 2004 to 2005. Previously, he was Mayor of Reykjavík from 1982 to 1991, and he chaired the board of governors of the Central Bank of...
later clarified that the loan was still being negotiated.
Crisis in real economy
At the end of November 2008, The Russian economy as a whole was not in a state of recession. The government forecast for 2009 stood at a 6.7% annual growth rate while a November 2008 World BankWorld Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
report projected 3% growth for 2009, However, a revised projection issued 30 March 2009 by the World Bank projects a 4.5% decrease for 2009 with unemployment projected to rise to 12% by the end of 2009. The World Bank report expressed concern about the condition of the poor and recommended increases in social support payments such as unemployment payments and child support payments. The report projected a slight rise in the average price of oil during 2010, up to $53 a barrel from the projected average of $45 for 2009.
In the middle of December 2008 Russian officials confirmed that possibility of a recession was inevitable. "Russia is headed for a recession", the country's deputy economy minister, Andrei Klepach
Andrei Klepach
Andrei Nikolayevich Klepach is a deputy economics minister of Russia, and since 2004 the director of macroeconomic forecasting department of the Ministry of Economic Development and Trade of the Russian Federation...
, has said. Asked whether Russia would have a recession, he said: "It's started already. I'm afraid it will not be over in the next two quarters. ... A major drop began in October and there will also be drops in November–December," he said, according to official reports. Recessions are normally declared after two quarters of negative growth. He also said that full-year economic growth for 2008 would be lower than the 6.8% previously forecast.
Steel industry
Russian steel industry is dependent on foreign markets and domestic construction and automobile industries. Crisis in the industry was first publicly reported in the end of September – early October. Magnitogorsk Iron and Steel WorksMagnitogorsk Iron and Steel Works
Magnitogorsk Iron and Steel Works , abbreviated as MMK, is the third largest steel company in Russia. It is located in the city of Magnitogorsk, in Chelyabinsk Oblast....
laid off 3,000 workers (10% of its Urals staff) and reduced output by 15% on 7 October, another layoff of 1,300 was announced in early November. Severstal
Severstal
OAO Severstal Russian: Северсталь, "Northern Steel") is a Russian company mainly operating in the steel and mining industry, centred in the northern city of Cherepovets. Severstal is listed on the RTS and LSE. As of 2009, it is the largest steel company in Russia according to The Metal Bulletin....
reduced domestic production by 25%; its US and Italian production dropped by 30%. Evraz Group
Evraz Group
Evraz Group is one of the world's biggest vertically integrated steel production and mining businesses, with operations mainly in Russia. In 2008, Evraz Group produced 17.7 million tonnes of crude steel.-Overview:...
, employer of 40 thousands workers in Kemerovo Oblast
Kemerovo Oblast
Kemerovo Oblast , also known as Kuzbass after the Kuznetsk Basin, is a federal subject of Russia , located in southwestern Siberia, where the West Siberian Plain meets the South Siberian mountains...
, was reported negotiating layoffs with the unions and regional government since 30 October. The company, specializing in construction-grade rolled steel, was inherently in worse position than other Russian steel mills. 13 November Evraz announced that, instead of layoffs, it will decrease workers' wages by a third. Some of Evraz facilities were converted to a four-day working week; the company reduced output to an estimated 50–60% of its capacity.
On 18 November Goskomstat
Goskomstat
Goskomstat was the centralised agency dealing with statistics in the Soviet Union. Goskomstat was created in 1987 to replace the Central Statistical Administration. While maintaining the same basic functions in the collection, analysis, and publicationand distribution of state statistics,...
insider reported an unprecedented drop in industrial prices – minus 6.6% monthly, following a 0.8% drop in September (the agency itself delayed its regular monthly report). Most of the losses concentrate in raw material industries; automobile and tool-making industries dropped only 0.4%. In two months, gasoline and diesel oil wholesale prices dropped by 12.8% and 16.5%. The worst price fall hit the steel industry: pig iron an ferric alloys dropped 21.7% in October after a 8.9% drop in September. Prices on aluminum and nickel are down to break-even
Break-even
Break-even is a point where any difference between plus or minus or equivalent changes side.-In economics:A technique for which identifying the point where the total revenue is just sufficient to cover the total cost...
point. The decline is sufficient to indicate a recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
.
In November the industry relied on government funds distributed through Vneshtorgbank
Vneshtorgbank
Bank VTB , former Vneshtorgbank, is one of the leading universal banks of Russia and the largest in terms of authorized capital....
loans. VTB issued a 10 billion roubles emergency loan to Evraz to finance its current tax payments; a similar 5 billion loan was issued to OAO TMK
OAO TMK
OAO "TMK" is one of the world's leading producers of steel pipes for the oil and gas sector...
. Magnitka
Magnitogorsk Iron and Steel Works
Magnitogorsk Iron and Steel Works , abbreviated as MMK, is the third largest steel company in Russia. It is located in the city of Magnitogorsk, in Chelyabinsk Oblast....
was reported "in the line" for VTB financing. The industry continued to implode, and on 14 and 18 November Novolipetsk Steel
Novolipetsk Steel
Novolipetsk Steel , or NLMK, is one of the four largest steel companies in Russia with sales of more than US$11.7 billion in 2008 and 9.2 million tonnes of steel output. NLMK's share of domestic crude steel production was about 13% in 2007. It primary produces flat steel products, semi-finished...
shut down two of its five blast furnace
Blast furnace
A blast furnace is a type of metallurgical furnace used for smelting to produce industrial metals, generally iron.In a blast furnace, fuel and ore and flux are continuously supplied through the top of the furnace, while air is blown into the bottom of the chamber, so that the chemical reactions...
s, reducing its pig iron
Pig iron
Pig iron is the intermediate product of smelting iron ore with a high-carbon fuel such as coke, usually with limestone as a flux. Charcoal and anthracite have also been used as fuel...
capacity by 2.5 million metric tons, or 27%. On the same day Novolipetsk Steel denied steel shipments to GAZ
GAZ
GAZ or Gorkovsky Avtomobilny Zavod , translated as Gorky Automobile Plant , started in 1932 as NAZ, a cooperation between Ford and the Soviet Union. It is one of the largest companies in the Russian automotive industry....
due to automobile maker's default on payments.
Automotive industry
In June 2008 The EconomistThe Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
described "Russia's booming car market" as a place where "you just need someone to count the money". In November the market slowed to its lowest since January 2007. AC Nielsen linked the market drop to a collapse in auto loan programs and general uncertainty among consumers, and predicted that unless auto loans recover, the market will slide back into 1990s. The government supported domestic auto makers by an increase in tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s on imports, leading to an expected 7.5–8% price increase for imported cars.
GAZ
GAZ
GAZ or Gorkovsky Avtomobilny Zavod , translated as Gorky Automobile Plant , started in 1932 as NAZ, a cooperation between Ford and the Soviet Union. It is one of the largest companies in the Russian automotive industry....
and KAMAZ
Kamaz
KAMAZ is a Russian truck manufacturer located in Naberezhnye Chelny, Tatarstan, Russian Federation. KAMAZ opened their doors in 1976...
were the first auto makers to declare production cuts in September–October 2008. GAZ
GAZ
GAZ or Gorkovsky Avtomobilny Zavod , translated as Gorky Automobile Plant , started in 1932 as NAZ, a cooperation between Ford and the Soviet Union. It is one of the largest companies in the Russian automotive industry....
truck production has decreased by 23.4% in September 2008; in October the company announced week-long shutdowns of the main assembly line to meet decrease in demand for its most successful line, the GAZelle
GAZelle
The GAZelle is a series of mid-sized trucks, vans and buses made by Russian car manufacturer GAZ. GAZelles are similar to the later launched GAZ-2215/GAZ-2752 Sobol and GAZ-3310 Valdai line of vans and light trucks...
truck. KAMAZ
Kamaz
KAMAZ is a Russian truck manufacturer located in Naberezhnye Chelny, Tatarstan, Russian Federation. KAMAZ opened their doors in 1976...
, the target of acquisition by Daimler AG since July, has been reporting financial difficulties since September. In October KAMAZ reduced working hours by a third, from six-day to four-day working week. KAMAZ requested a 15 billion rouble state-backed loan and took a private loan from Citigroup
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
at 9% over prime rate
Prime rate
Prime rate or prime lending rate is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favored customers, i.e., those with high credibility, though this is no longer always the case...
; in December Daimler AG acquired the first 10% in KAMAZ stock, citing "perfect storm" as a good time acquisition.
AvtoVAZ
AvtoVAZ
AvtoVAZ is the Russian automobile manufacturer formerly known as VAZ: Volzhsky Avtomobilny Zavod , but better known to the world under the trade name Lada. The company was established in the late 1960s in collaboration with Fiat...
disclosed emergency measures on 16 October, when Igor Sechin
Igor Sechin
Igor Ivanovich Sechin is a Russian official, considered a close ally of Vladimir Putin. Sechin is often described as one of Putin's most conservative counselors and the leader of the Kremlin's Siloviki faction, a statist lobby gathering former security services agents...
held an industry-wide anti-crisis brainstorming session in Togliatti
Tolyatti
Tolyatti , also known as Togliatti, is a city in Samara Oblast, Russia. It serves as the administrative center of Stavropolsky District, although it is administratively separate from it...
. AvtoVAZ
AvtoVAZ
AvtoVAZ is the Russian automobile manufacturer formerly known as VAZ: Volzhsky Avtomobilny Zavod , but better known to the world under the trade name Lada. The company was established in the late 1960s in collaboration with Fiat...
reported a stockpile of 100 thousands unsold cars (two months' output). The company requested government assistance of 1 billion US Dollars arranged through a Vneshtorgbank
Vneshtorgbank
Bank VTB , former Vneshtorgbank, is one of the leading universal banks of Russia and the largest in terms of authorized capital....
loan. Unlike other major borrowers who used VTB loans to substitute foreign capital, AvtoVAZ loan was intended solely to pay current expenses.
AvtoFramos, Moscow-based manufacturer of Renault Logan, has confirmed that instead of a planned weekly New Year holiday, the plant will stop for a month, 12 December 2008 to 12 January 2009. Trade unions asserted that AvroFramos has practiced short-time stoppages in November; plant administration refuted these statements. According to the unions, unsold stock reached 8 thousand cars, a month's output of the plant.
Amtel-Vredestein
Vredestein
Vredestein Banden B.V. is a Dutch-Indian manufacturer of tires for cars, commercial vehicles, tractors and bicycles. The company is independent of other large tire manufacturers and describes itself as "middle-sized". The corporate slogan is "Designed To Protect You"...
has closed two of its tire
Tire
A tire or tyre is a ring-shaped covering that fits around a wheel rim to protect it and enable better vehicle performance by providing a flexible cushion that absorbs shock while keeping the wheel in close contact with the ground...
plants due to cash flow problems. On 2 December media announced closure of Bor Glass Works, the principal supplier of auto glass, but the news was soon refuted as false by the plant administration.
Construction and real estate
In the first half of 2008 Russian construction industry, apparently immune of the global financial squeeze, grew by 22% in nominal money compared to 2007. In September–October Mirax Group, Sistema Hals, ST Group and other real estate developers announced freezing of future projects and intention to dispose of ongoing projects in early stages, citing an unacceptable increase in interest rates and uncertain demand. According to a Mirax executive, "our clients are panicking, and that is affecting our business", "... bank financing for developers has practically ceased". Developers and builders of a lesser scale are facing a "struggle to survive", especially in regional cities. In October 2008 OrenburgOrenburg
Orenburg is a city on the Ural River and the administrative center of Orenburg Oblast, Russia. It lies southeast of Moscow, very close to the border with Kazakhstan. Population: 546,987 ; 549,361 ; Highest point: 154.4 m...
construction executive described regional business prospects as "very bad", notably the fact that "there is no single bank for today which grants mortgage loan
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
s... Construction industry will not survive under such terms."
27 October Vladimir Putin urged the government agencies to increase state purchases of road and housing construction services, arguing that the state must capitalize on the decrease in prices of raw materials. The state allocated 50 billion roubles to buy ready-to-occupy urban housing from cash-strapped developers. Putin emphasized that the new contracts must be struck on new, decreased, price terms – estimated to be 20–30% cheaper than in spring. Strabag
Strabag
Strabag is a European construction company based in Villach, with its headquarters in Vienna, Austria). It is the largest construction company in Austria and one of the largest construction companies in Europe...
executive estimated that in 2009 construction costs will decrease a further 30%. In November Moscow city government has been successfully pressing local developers for a 25% discount against October auction
Auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
prices; the only developer who attempted to sue the city for a breach of contract withdrew their lawsuit and accepted the government terms. City government also pulled out of the 118-floor Russia Tower
Russia Tower
The Russia Tower is a partially built skyscraper in the Moscow International Business Centre of Moscow, Russia. Construction began in September 2007, and was planned to be completed in 2012. The total area of the structure would cover , of which 38% would be located underground...
project, which was immediately suspended by its developer, citing "credit crunch".
Other industries
In November, the volume of Russian paper exports to China decreased by 30–40%, coupled with a 30% drop in prices. Exports to Western Europe fare marginally better, with an estimated 25–40% drop in production volumes. Russia's largest producer of industrial paper bags, Segezh Paper Mill (controlled by the Bank of MoscowBank of Moscow
The Bank of Moscow is the fifth largest bank in Russia.In 2011, following a hostile takeover by VTB Bank, USD$ 9 billion in fraudulent loans were discovered and the bank received an unprecedented $14 billion bailout. Russia has issued an international arrest warrant for Andrei Borodin for his...
and the City of Moscow), declared a ten day shutdown on 24 November. UPM-Kymmene Oyj
UPM (company)
UPM-Kymmene Corporation is a Finnish pulp, paper and timber manufacturer. UPM-Kymmene was formed by the merger of Kymmene Corporation and Repola Ltd and its subsidiary United Paper Mills Ltd in 1996...
anticipates at least a 30–40% decrease in output compared to 2008. In June 2010, President Dmitry Medvedev visited Silicon Valley in San Jose, California in order to cultivate ideas of how to develop Russia as a major research center. Skolkovo, a mid-sized city near Moscow, is the proposed location for this Russian Silicon Valley, and will have its own tax structure. Yet, Medvedev has been criticized by opposition politicians for deflecting attention away from the struggling economy and corruption.
Airlines
In June–August 2008 the fleet of KrasAirKrasAir
KrasAir or Krasnoyarsk Airlines was a Russian airline with its head office on the grounds of Krasnoyarsk Yemelyanovo Airport in Krasnoyarsk. It operated scheduled regional and international passenger services, freight transport, cargo handling and charter services from the main base is Krasnoyarsk...
, a Krasnoyarsk
Krasnoyarsk
Krasnoyarsk is a city and the administrative center of Krasnoyarsk Krai, Russia, located on the Yenisei River. It is the third largest city in Siberia, with the population of 973,891. Krasnoyarsk is an important junction of the Trans-Siberian Railway and one of Russia's largest producers of...
-based airline with a controlling state interest, was grounded by the fuel suppliers' refusal to extend credit to the company that defaulted on payments. Other members of AiRUnion
AiRUnion
AiRUnion was a Russian airline alliance. It was the first airline alliance ever established in Russia. Member airlines and their affiliates enjoyed a high degree of co-operation in scheduling, ticketing, code sharing, flight transfer operations, frequent flyer program benefits, shared airport...
consortium, notably Dalavia, also folded in August. Thousands of passengers were stranded in airports; flight delays and cancellations became a national agenda. Government action focused on setting the cap on jet fuel
Jet fuel
Jet fuel is a type of aviation fuel designed for use in aircraft powered by gas-turbine engines. It is clear to straw-colored in appearance. The most commonly used fuels for commercial aviation are Jet A and Jet A-1 which are produced to a standardized international specification...
prices and restructuring its assets into a new company managed by Rostechnologii, a newly-formed state conglomerate
Conglomerate (company)
A conglomerate is a combination of two or more corporations engaged in entirely different businesses that fall under one corporate structure , usually involving a parent company and several subsidiaries. Often, a conglomerate is a multi-industry company...
. Ministry of Transportation distributed the licenses to fly former KrasAir routes to other companies. KrasAir also defaulted on payments to its staff, and on 27 October a strike action
Strike action
Strike action, also called labour strike, on strike, greve , or simply strike, is a work stoppage caused by the mass refusal of employees to work. A strike usually takes place in response to employee grievances. Strikes became important during the industrial revolution, when mass labour became...
, coupled with fuel suppliers' denial of service, finally ruined the airline. Dalavia lost its license earlier in October. The collapse of KrasAir also threatened Sky Express
Sky Express
CJSC Sky Express , also known in Russian as Скай Экспресс, was the first Russian airline to present itself as a low-cost carrier focusing on domestic flights...
, Russia's first low cost carrier co-owned by the EBRD and former manager of KrasAir. 22 October the assets of bankrupt KrasAir
KrasAir
KrasAir or Krasnoyarsk Airlines was a Russian airline with its head office on the grounds of Krasnoyarsk Yemelyanovo Airport in Krasnoyarsk. It operated scheduled regional and international passenger services, freight transport, cargo handling and charter services from the main base is Krasnoyarsk...
, Domodedovo Airlines
Domodedovo Airlines
JSC "Domodedovo Airlines" was an airline with its head office on the grounds of Domodedovo International Airport in Domodedovsky District, Moscow Oblast, Russia. It operated scheduled flights within Russia and the CIS, with a focus on flights to the Russian Far East. The airline also operated...
, Samara Airlines
Samara Airlines
Samara Airlines was an airline based in Samara, Russia. It operated scheduled and charter flights from Samara to destinations in Russia and other countries and charter flights to Austria, Cyprus, Greece, Israel, Spain, Turkey and United Arab Emirates...
and Atlant-Soyuz Airlines
Atlant-Soyuz Airlines
OJSC Moscow Airlines was an airline based in Moscow, Russia, operating domestic and international passenger flights out of Vnukovo International Airport. It operated from 1993 to 2010.- History :...
were consolidated in a new company, Rosavia, co-financed by the City of Moscow and Rostekhnologii. Rossiya
Rossiya (airline)
Rossiya Airlines OJSC , operating as Rossiya — Russian Airlines is a secondary national airline with its head office in Saint Petersburg, Russia, resulting from the 2006 merger of the Moscow-based company of the same name and Saint Petersburg-based Pulkovo Aviation Enterprise...
, Orenair, Kavminvodyavia
Kavminvodyavia
Kavminvodyavia was an airline based in Mineralnye Vody in the Caucasus, Russia. It operated scheduled services to over 20 destinations in the northern Caucasus region and abroad, as well as charter services...
, Vladivostok Air, Dalavia and Saravia
Saravia
Saravia is an airline based in Saratov, Russia. It operates charter and scheduled domestic passenger flights and international charters from Saratov to destinations in Europe and the CIS. Its main base is Saratov Tsentralny Airport .-History:The airline was formed from the Aeroflot Saratov division...
were originally planned to join this proposed airline holding company, too, which would have made Rosavia the largest Russian airline by fleet size. Following a 20 percent drop of domestic passenger numbers in Russia per month, the federal government scrapped all plans concerning the new airline on 5 March 2009
Agriculture, food industry and retail
Russia had a high grain harvest in 2008, but so it was elsewhere in the world, bringing the prices down. To support the trade, Dmitry MedvedevDmitry Medvedev
Dmitry Anatolyevich Medvedev is the third President of the Russian Federation.Born to a family of academics, Medvedev graduated from the Law Department of Leningrad State University in 1987. He defended his dissertation in 1990 and worked as a docent at his alma mater, now renamed to Saint...
authorized a state export subsidy of 40 US dollars per metric ton. This, according to the minister of agriculture, is sufficient to maintain exports at 20–25 million metric tons. The food industry is, however, locked between high costs of farm produce and tight price and credit terms dictated by retail chains. Food industry executives anticipate that the chains will eventually lose part of their clients to street markets, as the suppliers are forced to develop this independent sales channel.
Domestic retail chains, heavily leveraged
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
, were experiencing liquidity crisis
Liquidity crisis
In financial economics, liquidity is a catch-all term that may refer to several different yet closely related concepts. Among other things, it may refer to Asset Market liquidity In financial economics, liquidity is a catch-all term that may refer to several different yet closely related...
at least since April 2008. The first chain to go bankrupt in May 2008, Grossmart (190 stores in Moscow region), had a particularly high debt-to-EBITDA
EBITDA
EBITDA is an acronym for earnings before interest, taxes, depreciation, and amortization. It is a non-GAAP metric that is measured exactly as stated. All interest, tax, depreciation and amortization entries in the income statement are reversed out from the bottom-line net income...
ratio of 6 to 1. Arbat Prestige, subject to government attacks since 2007, defaulted on its bonds in June. In November 2008 nine leading food retail chains (out of nearly 300) received access to government-backed financing. Nevertheless, retailers are pressing food suppliers for longer credit terms or bigger cash discounts, demanding up to 50% price cut for cash payment. Suppliers, in a mirror move, raised "regular" credit prices by 20–60%. Rather than submit to the chains' demands, they simply refuse to sell; visible depletion of stocks has affected only a few affected chains.
Unemployment
A proprietary Ernst & YoungErnst & Young
Ernst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers ....
survey of 113 clients that leaked into Russian press in November summarized their losses at 8% of managerial and 6% of low-level jobs by end of October. All companies in the survey practiced some sort of reducing labor costs. One company in four practiced unpaid "vacations"; 8% of clients settled for reduced working hours. Federal Migratory Service announced in November that 1123 Russian companies reported upcoming layoffs of 45 thousand.
Most layoffs were reported in metallurgy and financial services: 20% in Uralsib
Uralsib
Uralsib is a leading Russian financial corporation. It was created by merging Uralsib bank with Nikoil Finance. The latter was Nikolai Tsvetkov's company closely affiliated to LUKoil....
, 1000 in Vneshtorgbank
Vneshtorgbank
Bank VTB , former Vneshtorgbank, is one of the leading universal banks of Russia and the largest in terms of authorized capital....
's VTB24 retail division. 1 December Vedomosti
Vedomosti
Vedomosti is a Russian language business daily. It is a joint venture between Dow Jones, the Financial Times and Sanoma, publishers of The Moscow Times....
reported upcoming 40% cuts in MDM Bank
MDM Bank
MDM Bank is a Russian Joint Stock commercial bank, one of Russia's largest private banks based in Novosibirsk. As of August 2009, the bank completed a merger with Novosibirsk-based URSA Bank. The new bank will operate under MDM Bank brand name as an Open Joint Stock Company, but the merger is...
and 80% in IFD Kapital. Sberbank
Sberbank
Sberbank Rossii is the largest bank in Russia and Eastern Europe. The company's headquarters are in Moscow and its history goes back to Cancrin's financial reform of 1841...
endorsed a long-term program to reduce headcount by 25% in 2014. In telecommunications, Sitronics
Sitronics
Sitronics is a microelectronics company based in Moscow, Russia and controlled by Sistema holding. Its main assets are the electronics fabs, research and development facilities in Zelenograd and elsewhere in Eastern Europe....
laid off up to 10% in all business units; in audit services, Deloitte Touche Tohmatsu
Deloitte Touche Tohmatsu
Deloitte Touche Tohmatsu Limited , commonly referred to as Deloitte, is one of the Big Four accountancy firms along with PricewaterhouseCoopers , Ernst & Young, and KPMG....
reduced number of partners in its Russian division by 17 out of 180. Vedomosti
Vedomosti
Vedomosti is a Russian language business daily. It is a joint venture between Dow Jones, the Financial Times and Sanoma, publishers of The Moscow Times....
has set up a private "layoff newsreel" syndicating independent reports of job cuts, yet as at 7 December 2008, there are no reliable nation-wide statistics on white-collar unemployment, which usually escapes official unemployment record.
By late November, Kremlin First Deputy Chief of Staff, Vladislav Surkov
Vladislav Surkov
Vladislav Yuryevich Surkov is a Russian businessman and politician. Currently he is a First Deputy Chief of Staff of the President of the Russian Federation and a top aide to Vladimir Putin. Vladislav Surkov is widely seen as the main ideologist of the Kremlin...
, was warning that the middle classes should be defended from poverty during the crisis. He called for swift measures to protect the middle class from layoffs and to support consumption. "If the 1980s were the times of the intellectuals and the 1990s were the times of the oligarchs then the 00s can be seen as the epoch of the middle classes,' Surkov said in a speech published on the Web site of the ruling United Russia party ... The main task of the state during the slump must become the preservation of the middle class, the defence of the middle class from the waves of poverty and confusion that are coming from the West," he said.
According to official statements released 9 December, rate of unemployment growth peaked in the middle of November and slowed down in subsequent weeks. In the week ending 3 December overall unemployment grew by 1.6% to 1.315 million people, following a 2.3% increase in the preceding week. The state also reported an increase in unpaid vacations and reduced working week employees to 149.3 thousands. The number increased by 84% in a single week ending 3 December. The trade unions anticipate that official unemployment will peak at around 2 million people in 2009, when hidden forms of unemployment become visible to statisticians. Yet on 12 December Putin announced completely different unemployment numbers – 4.6 million in October.
In February 2009 the unemployment rate peaked at a seven-year high of 9.4%, then began to steadily decline, falling to 7.7% as of October.
Consumer price inflation
Official consumer price inflation in January–August 2008 reached 14.8%. By the end of November, food price inflation for an 11-month period reached 15.3%. Overall price inflation, taking into account consumer and industrial prices, reached 12.5% compared to 10.6% for the same period of 2007. Decline in short-term inflation was credited to a reduction in monetary supply. Inflation slowed through 2009 with a year on year rate of 9.1% as of November, down from 13.8% a year earlier.See also
- Financial crisis of 2007-2008
- Economic crisis of 2008
- 2008-2009 Latvian financial crisis
- 2000s commodities boom2000s commodities boomThe 2000s commodities boom is the rise in many physical commodity prices which occurred during the decade of the 2000s , following the Great Commodities Depression of the 1980s and 1990s...
External links
- World Bank's Russian Economic Reports Official site
- Russia's actions during the crisis compared to those of other countries
- http://www.rts.ru/en/Russian Trading SystemRussian Trading SystemThe Russian Trading System is a stock market established in 1995 in Moscow, consolidating various regional trading floors into one exchange. Originally RTS was modelled on NASDAQ's trading and settlement software; in 1998 the exchange went on line with its own in-house system...
Official site] - http://www.micex.ru/marketsMoscow Interbank Currency ExchangeMoscow Interbank Currency ExchangeThe Moscow Interbank Currency Exchange or MICEX is one of the largest universal stock exchanges in the Russian Federation and East Europe. MICEX opened in 1992 and is the leading Russian stock exchange...
Official site] - Some of aspects of state national economy evolution in the system of the international economic order.