Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Russo-Georgian War Aftermath Impact on Financial Markets

Politics / Global Financial System Sep 05, 2008 - 03:27 PM GMT

By: STRATFOR

Politics Best Financial Markets Analysis ArticleA redefinition of Russia has taken place — rather jarringly — following its war with Georgia, and the entire world is reassessing its position and relations with the resurgent power. This reassessment includes financial factors — a much more tender area for today's Russia than for the Soviet Union, because Russia's large economy is tied into the global economy.


During the Russo-Georgian war , Russia's stock index declined to its lowest level in two years, the ruble registered its largest monthly decline against the U.S. dollar in more than nine years, and foreign investment flight amounted to $25 billion in just three weeks, according to French investment bank BNP Paribas.

But the flight of foreign direct investment that has resulted from deteriorating ties between Russia and the West will not hurt Russia as much as is believed. Rather, Russia will be dealt a massive blow when the West ceases giving Russian companies the financial access they need to continue expanding or even operating. The main reason Russian companies have done so well in the past few years (and made Russia a much stronger country) is that foreign entities have been the ones financing their expansion. This is all about to change.

The Russian Model

There are three main types of financial models in the world: Western, Asian and Russian. The Western financial model is economically based, with gaining money and profit as the end goal; such a model tends to crush inefficiency and protect the system as a whole. The Asian model is socially based. This model's goal is maximum employment and social stability, where money is used as a political resource for nonfinancial ends despite all inefficiencies. The Russian model is politically based. In Russia, finance is a political tool to control the country and operates much like money for loan sharks or organized crime. The system is highly inefficient, but it allows a very small few to hold all the power in an enormous country.

It is the Russian model that has made it nearly impossible for Russian companies to gain access to cash outside their own earnings and has led them to look outside the country. To put it simply, a company needs money in order to grow; in its search for that money, it has three options. It can use its own money, but this limits a company in its ability to make major purchases, take on large projects, or greatly or quickly expand. This option has been seen not only in companies' purchases, but in most financial transactions in Russia. A good example of this in Russia is mortgages, which the country had never seen until the past few years. Previously, Russians had to use their own money to buy homes without any financing options.

The other two options involve borrowing money, either by taking out loans or by issuing bonds. A loan would have to come from a bank, and any sizable loan would have to come from a large (most likely Western) one. Issuing bonds is like dividing up pieces of a loan to a number of purchasers.

Most Russian companies cannot turn to Russian banks for loans, because the banks are either too small to finance major projects or are state- or oligarch-owned. Of Russia's 10 largest banks, the top five are all state-owned, which means that if a company wants to finance a major project it has to develop an understanding with the Kremlin. Traditionally, the major state banks have stayed out of financing large projects, mainly because they have no expertise in these fields. When the government does actually step into the role of financier, it is usually because of political or control issues and not because the Kremlin sees a good investment.

The other large banks in Russia are typically oligarch-run. The oligarchs are billionaires who lead most of Russia's vital sectors, both private and state-controlled. Most of these individuals rose to power during the Yeltsin-era “shock therapy” transition from socialist structures to capitalist ones (which more resembled a free-for-all), but the oligarchs who have remained in power are either owned by the Kremlin or have the Kremlin's blessing to continue holding strategic sectors. During their rise, the oligarchs basically created their banks in order to fund projects or manage their own companies. For example, Rosbank was created by the owners of Interros — oligarchs Mikhail Prokorov and Vladimir Potanin — in order to finance projects by Interros' Norilsk Nickel, the world's largest nickel company. These banks typically are not able to take on any other company's major projects and often cannot handle major financing for their own related firms; moreover, these oligarchs have no interest in funding any rival oligarch's expansion plans. The oligarchs also created these banks in order to keep the Kremlin from having a say in their companies and projects (though the Kremlin has since either worked its way into partial ownership of most “private” banks or placed lackeys as bank chiefs).

Russian companies cannot issue bonds to the domestic market simply because there are not enough interested people in the country with the money to buy them. Those who have money to spend are, once again, the government or the oligarchs, and all the same rules apply to their investment in bonds as to the banking sector.

The only option left has been for Russian companies to turn to foreign money and banks. This is an option Russian companies have turned to only very recently (in the last five years) after the fall of the Soviet Union and a decade of economic turmoil. The Russian market has been so starved for capital — particularly for investment, and for nearly a century — that foreigners are seeing a lot of bang for their buck in financing Russian companies, and they have been lending cash and snapping up bonds left and right. The potential for growth in Russia is so great that foreign cash is estimated to fund 70 percent of Russian debt. It is foreign loans and bonds that are actually making a difference in Russian companies and economic expansion.

Sudden Changes

But the Georgian-Russian war has changed all of this. It is not that the war was the proximate trigger for the massive fall in Western confidence in Russia; rather, it was a clear sign of a downfall already in progress. General perception of and confidence in Russia has now changed — especially in the West. Russian companies (and then the Russian economy) will have to shift when the reality hits that the West simply no longer has confidence in Russia or its companies. Russia was already a risky market, given the Kremlin, oligarchs and organized crime, but when global credit conditions are poor — as they are now — investors tend to shun riskier ventures.

According to BNP Paribas, the amount of debt raised by Russian companies in August was 87 percent less than July's levels, and the issuance of new equity nearly halted — from $933 million in July to $3 million in August. This dramatic slowdown will not lead to a Russian collapse (the country does have its own money), but Russian companies will find it very hard to raise capital and fund expansions, leading to stagnating operations.

Russian President Dmitri Medvedev is already hearing the cries of Russian companies and oligarchs over the tightened situation and restrictions from world financial markets. Medvedev will be meeting with the country's biggest firms and businessmen at the annual Russian Union of Industrialists and Entrepreneurs summit on Sept. 19-20. Medvedev has vowed to unveil a new program for easy credit soon after the summit, once he has input from the country's business leaders.

The Kremlin's Options

There are three options for Moscow. First, Russia could just take the blow, no matter how many ticked-off oligarchs it creates. This would mean that some of Russia's most powerful companies would have to revamp their plans entirely. Such a move would definitely affect the expansion plans of nonstate firms, but it will also hit many state companies — like energy giants Rosneft and Gazprom — which have been gorging on the bonds markets. It also means that the Russian government, which uses many of the companies as champions and tools for domestic or foreign control, would have to overhaul its future strategy as well.

Second, the government could learn how to spend money. Moscow does not have a problem with cash and holds the world's third-largest foreign currency reserve (currently just under $600 billion). The problem is that the government does not like to spend any of its reserves unless it is desperately needed. The only time in the past decade the Kremlin has dipped into the reserves was to finance its war with Georgia. But some Russian oligarchs, like Potanin, are already calling on the Kremlin to tap its reserves to ease the crisis.

The third option is the most difficult: Russia could actually set up a real large bank for real large loans. But this would change the country's entire financial model and cut the Kremlin's and local politicos' abilities to control and manipulate who can borrow money and for what. The social and economic implications of this option are something that the Kremlin has never shown it is willing to risk. Setting up a real banking structure would offer people in Russia a resource outside the government's control, which would in turn give them the ability to have an opinion and hold economic power, and potentially rival the government in making decisions — something that Russia has never seen or allowed before.

By George Friedman

This analysis was just a fraction of what our Members enjoy, Click Here to start your Free Membership Trial Today! If a friend forwarded this email to you, click here to join our mailing list for FREE intelligence and other special offers. Please feel free to distribute this Intelligence Report to friends or repost to your Web site linking to www.stratfor.com .

© Copyright 2008 Stratfor. All rights reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis.

STRATFOR Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in