Russian Banking System Begins Big Meltdown !!

In an economic and political event that is very quickly building steam, the Russian banking system is failing. Depositors are fearful of losing their savings in a system with little if any insurance against losses. Recently a 10% withdrawel penalty is being applied to stem the $100 million per week run on one bank.

Russia could be on verge of banking crisis
In the last two weeks, two large banks abruptly closed their doors. One pensioner couldn't withdraw his $1,000 in savings.
" It's another trick, a deal between the powers that be to rob us," he says in Russian. "I'm sure I won't see my money."
A woman adds: "My husband and I have decided not to keep our money in the bank for the next six months. We'll put it in a jar at home."


Banking Crisis Russian-Style
Russian banks are coughing and wheezing. Dialog-Optim announced that it was limiting deposit withdrawals, while CreditTrust has had its license revoked. It is quite astonishing. There is no GKO pyramid, and world oil prices are sky-high. According to the financial barometer, there should be complete calm -- and yet a storm is brewing: Interest rates on the interbank lending market are breaking records, and the only thing saving Russia from a fully fledged banking crisis is the absence of a fully fledged banking system.

This is a classic scheme for stripping banking assets, but even in the no-holds-barred '90s, the scheme was only used to avoid paying real creditors. The fact that two years after the bank's bankruptcy, the owners of such promissory notes should demand money from an oligarch whose only crime is that one of the banks with which his companies worked had accounts at First Municipal is unprecedented in Russia. Maybe it has something to do with the fact that Rshtuni, until recently, was adviser to Yukos CEO Simon Kukes. When Rshtuni quit the company, the leaking of confidential company documents to the prosecutor's office suddenly ceased.

Banking crisis looms over Russia again
While few say today's crisis will reach the magnitude of the 1998 meltdown, most analysts agree that the worst is yet to come and is likely to result in the ruin of as many as hundreds of Russia's 1,300 banks.
"Tip of the iceberg" is how the UFG brokerage described the current problems in Russia's banking sector, which has remained largely unreformed since the Soviet era.

Meanwhile Alfa Bank, the nation's fourth-largest, faced a run on its branches as well, with customers withdrawing 100 million dollars in less than a week.

In an effort to stop the hemorraging, Alfa slapped a 10 percent surcharge on early withdrawals and promised premiums to customers who stayed.


Russia's Fiscal Crisis Explodes
Only a week ago, the question would have sounded alarmist, even ridiculous to most ears. But now the concerns are mounting thick and fast. Russia already faces a collapse of popular confidence in its banking system greater than any the United States has experienced the climax of the Great Depression in March-April 1933.

"The ruble's weakening against the European currency is explained as coming from a sharp surge in the euro against the dollar on the world market," the paper said. "The dollar has lost 0.5 percent against the euro over the past 24 hours and almost 2.5 percent compared with June 25."

Hovering over all is the question of what is going to happen to Yukos, the largest oil corporation in Russia and one of the largest in the world. For on Tuesday, Russia's top prosecutor signaled that despite previous reassurances from President Vladimir Putin himself, they were determined to squeeze Yukos until it burst.

"This is snowballing," Prosecutor General Vladimir Ustinov told Ekho Moskvy radio Tuesday, the paper said. "There is a beginning to this affair but there but it's very difficult to see the end. The level of stealing, fraud and tax evasion is so huge that it cannot all be packed into one case."



This is being compared to the US banking crisis during the depression era. Let us remember that the US depression and banking crisis began in other countries, and related to the gold and currency exchange. Now, the Euro is coming in to play again.


Once again, the Dollar slides, the Euro rebounds, and Gold is on the upswing. One can only ponder, is this a trend?...will there be an international event or intervention?...and is this related to oil or petro-dollars?

Time will tell.

U.S. DOLLAR INDEX September 2004
EURO FX September 2004
GOLD December 2004




[edit on 17-7-2004 by smirkley]

Excellent post!

The US and other Western Countries are also heading for a banking crisis.

There is an excellent article (dated yesterday) summing up the current economic situation in the US. Near the end of the article is a graph relating to debt. There are two very large peaks on the graph. One is right now. I'll give you one guess when the other one was.

I believe that there is an end-game in play. The beginning of the peak oil crisis is keeping prices over $40 per barrel. That kind of price creates inflation and the FED is responding with interest rate hikes. I don't see the price of oil easing anytime soon. Certainly not under $30. So when inflation starts to take its toll and interest rates spike, there is going to be a major debt crisis.

With the cost of living going up, and interest rates preventing borrowing, cash strapped consumers cease to buy big ticket items. As the crisis deepens there will be massive defaults and bankruptcies leading to a banking crisis.

The economy is a revved up sports car heading for a brick wall, and the passengers are arguing about which radio station to listen to.

Heads up! There's trouble ahead.

edit spelling

[edit on 7/17/2004 by Gools]

As a reply, I wanted to expand on coincidences related to the oil company Yukos.

In exactly this same time frame that the banking crisis is occurring, the Russian government is taking action against the huge oil producer, Yukos.

With oil trading around $40 per barrel, it is interesting that Yukos assets are going to be seized, and redistributed. This will be a windfall to many smaller companies that could not compete with the huge organization.

Analysts say great damage was done to rule of law in Russia
WASHINGTON - The Kremlin's assault on Yukos Oil Co. has left Russia's most successful, most Western-like oil company maimed, perhaps near death.

And the effects could be felt in the world oil markets for years to come.

"It's sad news for all of us," said Leo Drollas, chief economist for the London-based Centre for Global Energy Studies. "We're going to pay for it eventually."

The Putin government's treatment of Yukos raises fresh questions about Russia's commitment to privatization and the rule of law, concerns that have bedeviled the country's economic recovery since of the collapse of the old Soviet Union.

By last year, Russian liquids production hit 8.4 million barrels a day, up 10 percent from the previous year and up 40 percent from 1998, the Energy Information Administration said.

In fact, Russia has been competing with Saudi Arabia to rank as the world's largest oil producer.


Yukos: Russia's policy battleground
Russia supplied 11.4% of world oil last year, making it the biggest single source after the Opec cartel.

The official figures say oil makes up 9% of Russia's gross domestic product, but the World Bank believes that widespread corporate tax doging masks a real figure of closer to 25%.

Yukos alone accounts for 4% of Russia's economy. With daily output of 1.7 million barrels, it supplies nearly as much as Opec has promised in extra output to cool red-hot world oil prices.

That is an excellent article Gools,..and a great coorolation to the world situation within it.

Interest rates rising in Russia will likely cause a recession in the country.

That coupled with the beginning of the Fed raising domestic rates,..high energy prices,...increasing foods and consumables prices, .. WILL ultimately translate as inflationary in the states, and possibly recessionary.

Quoted from your article posted,..

An economy this leveraged and a financial market that is this highly geared can�t afford to withstand a major rise in interest rates.

The selloff in bonds in April and May is a prelude of things to come, if rates edge higher. The �carry trade" is far from unwound. Most hedge fund managers are running negative returns this year. As some analysts have commented, this has been an unusual cycle. Since the carry trade has yet to fully unwind, there is the risk of a financial mishap later this year, if the Fed continues to tighten. Most players in the bond and derivative markets are on the same side of the fence. Everyone can�t be perfectly hedged. Someone, somewhere is on the wrong side of a trade. The question is who, how big are they, and who are their counterparties?



This leads to question if the world is prepped to experience a tightening of credit, as well as spiraling inflationary-measured costs. Already we are experiencing a big increase in existing home sales, as seller's are becoming flexible to the buyer's (IE-regional deflationary home value's), and the buyer's are scrambling to take advantage of what appears to be the end of low finance rates. Let us not forget the outlandish increase in home prices in the hot markets, that give an obvious appearance of a bubble-yet-to-burst.

All this while the US government is experiencing massive deficits and increasing expenditures. What will it take to continue to entice foreign investment in Treasury Notes, to keep the federal level of spending financed? A better payout to the investors. Otherwise they may be inclined to look elsewhere.

Wow, really great posts.

Some more info I found:

America�s deficit will not resolve itself without much pain, suggest the OECD economists. America must beggar its neighbours with a competitive devaluation of the dollar, or beggar itself with a massive fiscal contraction�or both.
www.economist.com...

Employment only increased by 112,000 in June, compared to about double of that in May (at which time President Bush was quick to point public attention to job gains). US employment is still one million jobs below peak four years ago; further, private payrolls are 1.9 million below peak.

The Chinese government is moving to slow its economy as non-labour resources are becoming over-utilized.

Japan's economy was in a slump since '90, but has had positive growth in '03 and projected for '04. But Japan is running massive deficits in attempting to stimulate the economy. And Japan has been suffering a financial system confidence crisis of its own. A bank merger may help Japan out, but if China's growth, which had been stimulating Japan's economy, lessens its pace, prospects are uncertain.

China is also in trouble. Even though it is the fastest growing economy right now, they will not be able to maintain that for much longer.

An article discusses the pressure China is putting on world oil prices as it tries to increase reserves and avoid an accute energy shortage.

China's economic growth has become more and more dependent on crude oil in recent years, and its energy shortage is acute.

The economy is still growing but at a slower pace (7% projected) from last year's 9.7% (source). Despite this, the Chinese government is trying to slow growth even further since the economy is in serious danger of overheating (source)

China is also facing a large real estate bubble leading to distortions in the market (banking in particular). The speculative investment money flowing into the country is causing the bubble as well as a land grab for industrial space, forcing China to rent land from Vietnam to feed its people (source)

Finally, the call from the central government for a cooler economy is not being heeded (source).

What happened is that, with energy and transportation sectors already bursting at the seams under the deluge of investment in industries such as steel, cement and real estate, and with bad debts piling higher on banks' books, Beijing tried to rein in the runaway enthusiasm, issuing a moratorium on further investment in those key industries. The central state's decree fell on deaf ears. Local governments kept pouring money into these booming sectors.

It is doubtful that China can control its runaway growth which is causing distortions, a real estate bubble and a speculation bubble all about to meet up with an energy crunch.

The impending meltdown will be worldwide and no economy, no matter how seemingly strong at the moment, will escape it effects.

edit spelling

[edit on 7/18/2004 by Gools]

All the above articles and quotes above were pulled from dated material links. They were about two weeks dated. A little more digging this morning indicates to me that all is fixed now, continue being productive Russian citizens. Your Rubles are safe and sound.


What can change in a week or two? What has completely changed the run on banks there? What completely changed the face of their economy in such a short time? IMO propaganda backed up by government intervention.

Banking crisis eases in Russia
Standard Poor's said the Russian central bank helped stabilize the situation early this week by cutting reserve requirements for banks, injecting money into an industry facing a cash crunch.

"The situation appears to be stabilizing owing in part to the reduction in cash reserves requirements, which will infuse more cash liquidity into the banking market," S&P said.


Maybe I am mistaken, but lowering reserve requirements does not make for stability. Quite the opposite I think.


Crisis of confidence is over in Russia
MOSCOW - Russian Central Bank Chairman Sergey Ignatyev believes that the crisis of confidence in banks has been overcome. There are certain hopes that measures taken by the Central Bank have promoted the end of this crisis, he told journalists.

Mr. Ignatyev believes that a decrease in the amount of obligatory reserve payments and adoption of new bills by the State Duma have restored confidence in banks. According to him, currently it is necessary to fuel the interbank credit market to reestablish the banks� confidence in each other. In this respect, the Central Bank welcomes the initiative of Sberbank to enlarge the volume of bank-to-bank lending, he added.

Russia passes law to stem bank crisis
Alfa Bank - Russia's fifth largest by assets - paid out about $200 million in just three days, while Guta Bank was forced temporarily to shut its operations last week after clients withdrew $344 million in June.

Over the weekend, Russia's lower house of parliament, the State Duma, whisked through emergency legislation guaranteeing deposits in failed banks of up to $3,350. When the law goes into effect in mid-August, it will allow Sodbiznesbank depositors to get their money back because it is retroactive from December 2003.

How long the current problems will continue will depend on how depositors react to the new legislation and on their sensitivity to rumors of doom and gloom on the market, Westin said.


I am in the thought that if a banking system is so unstable, and requires government intervention, and the propaganda is applied to ease public concerns about their money being safe, that the problem is not fixed. At least not in just a couple of weeks. It is obvious more basic restructuring of the system is needed. Lowering capital requirements of banks do not necessarily make them stronger, it just allows them to payout the cash in a psychological effort to make the solvency appear more realistic.

I will be watching these and new developments in the coming weeks.

(had difficulty appending this to my last post..so a new reply )



This is exactly what I am suggesting...

Alfa Bank, which is still smarting from front-page coverage of a run on several of its branches, said that it had earmarked about $700 million to absorb the panic.



"The ones who took out their money were people with smaller savings; they rely on the media for their information," Alfa Bank's Kosogov said. "The ones with more cash ask a few questions, make a few phone calls, and calm down."



If it were just small time saver's, and implied insignificant or ignorant, then why $700 million and government intervention? Why the chaos?

Becouse the small time saver's are big in numbers, and can cause disruptions. The big money people never go cash. They just shift into other mediums. They have the knowledge and ability to be able to utilize all forms of investment. The small saver's live to pay bills and buy food. When there is concern, the small guy just wants to know he can eat tomorrow.

Originally posted by smirkley
Maybe I am mistaken, but lowering reserve requirements does not make for stability. Quite the opposite I think.

In general I agree, but for a short time, given the situation, I think this action stabilized the situation. If I understand this right, they're talking about reserve requirements of the Russian chartered banks at the Central Bank.

I am in the thought that if a banking system is so unstable, and requires government intervention, and the propaganda is applied to ease public concerns about their money being safe, that the problem is not fixed.

I think the larger problem is very much still there, but this specific run on the banks was its own problem -- something (I'm not sure what, perhaps rumours or some press release blown out of proportion) initated the run, and then the run itself caused the problem of banks having insufficient paper cash on hand, which then fed the panic that the banks were crumbling, etc...

it just allows them to payout the cash in a psychological effort to make the solvency appear more realistic.

Yup, but the run on the banks was a psychologically triggered event, no? I agree wholeheartedly that this is no long-term solution to Russia's banking problems.

Reserves are a "guarentee to the central bank" NOT a needed amount of cash for today's operations.

When you have a "run on the banks" of enough magnitude to deplete the reserves you must lower the reserves or fail. It that simple.

Assuming the run was caused by unfounded panic thsi was the correct action to take and I beleive it shows a banking system that has matured greatly from 1998.

While I agree that the Russian banking system is fraught with problems this crisis management was timely, considered and logical. Best of all it worked. For the short term at least.

m...

I agree, a short term (I hate to use the word 'fix') fix was absalutely necessary and this was the only likely option to stem the flood. It does appear phsycological in nature, but considering recent memories of the citizens you have to understand the quick panic was an easy frame of mind to succumb to.

The goverment disassembling Yukos may also be a 'fix' but it will also be destabilizing considering the scope and size of the overall amount of the GDP it represents.

Obviously some immediate followup 'core' changes will be required to prevent more liquidity from being needed.


*edit - spelling*

I am curious of anyones take on the global interest rate situation, and how this will reflect globally on the economy.

[edit on 19-7-2004 by smirkley]

Alfa bank is suing a newspaper for spreading rumors of a crisis.
The rumors that led to a panic that resulted in a loss for the bank.

The Kommersant daily, a top Russian newspaper owned by exiled tycoon Boris Berezovsky, that published a number of articles this month on the supposed banking crisis, is the first of the newspapers that the bank is planning to sue, Alfa Bank spokesman Stanislav Ismagilov told MosNews.

In its press release, the bank is accusing the Russian media of causing a panic that led to losses not only among Alfa Bank clients, but also among smaller banks and non-government banks in general by provoking a liquidity crisis.

Mosnews

Originally posted by smirkley
I agree, a short term (I hate to use the word 'fix') fix was absalutely necessary and this was the only likely option to stem the flood. It does appear phsycological in nature, but considering recent memories of the citizens you have to understand the quick panic was an easy frame of mind to succumb to.

The goverment disassembling Yukos may also be a 'fix' but it will also be destabilizing considering the scope and size of the overall amount of the GDP it represents.

Obviously some immediate followup 'core' changes will be required to prevent more liquidity from being needed.


*edit - spelling*

I am curious of anyones take on the global interest rate situation, and how this will reflect globally on the economy.

[edit on 19-7-2004 by smirkley]

I think that the raising of rates will cause housing
to cool off maybe busting the housing market bubble.
At any rate look for higher oil prices causing higher
inflation which in turn will cause a drop in consumer
confidence and put a world of hurt on the stock market.

If we drop below 10,000 look for a one time drop of
at least 150 points drop (probably more) on the
Dow industrials. Best bet? Gold and Silver..............

Originally posted by Soul Reaper
Best bet? Gold and Silver..............

I agree.

I would also add energy companies. A rise in price is almost pure profit to them.

Originally posted by Soul Reaper
If we drop below 10,000 look for a one time drop of
at least 150 points drop (probably more) on the
Dow industrials. Best bet? Gold and Silver..............

Well, the Dow is down 270 points from its high yesterday of approximately 10220 to its low today of approximately 9950 and trending back down this afternoon. What is your catalyst for a 150 point drop if we drop (or if we close?) below 10000? We've done that before in recent months (mid-May is the most recent).

[EDIT]: Sorry, here's the link to a two-day I was using: money.cnn.com...

[edit on 7/22/2004 by titian]

The catalyst will be JOBS! As always consumer confidence is core right
now never mind the fiqures. If people think that there are less
good paying jobs, they will tend to spend less on big ticket items.

The up side to this is that American people tend to be bullish on
the economy so it would take something big to actually get the
the ball rolling downhill like a terrorist attack on a well known
financial building like the WTC..or the Sears Tower, John Hancock
building etc. If that were to happen, it could well signal the beginning
of the next Great drepression otherwise look for a long decline
into the bottomless pit of anarchy.

Tell me something, am I looking too deep here and seeing something that isnt happenning?

First:
Russia has a huge run on the banks....
Banking crisis looms over Russia again

Then:
The Russian government suggests it is only panic by the uneducated and uninformed lower savings class....

Then again:
ALFA announces that they are suing a newspaper for causing the run on the banks...
Alfa Bank to Sue Top Newspaper for Spreading Rumors of Crisis

Suddenly: (from an ATSNN article)
WAR: Russia Seriously Considering Sending 40,000 Troops To Iraq

But even more:
Russia denies plans to send troops to Iraq

Earlier the US Strategic Forecast - Stratfor Analytical Agency had reported about secret negotiations between Washington and Moscow on dispatching up to 40,000 Russian troops with Chechnya experience in exchange for economic concessions.

In his categorical statement Russian Foreign Ministry spokesman Alexander Yakovenko rejected US reports as groundless that Moscow and Washington are conducting talks on the dispatch of Russian military to Iraq in exchange for economic concessions.



All within the last few weeks.

It just seems something is brewing in the Russian economy. It is hard to determine with all sides chiming in and much conflicting evidence. I guess when the facts are really out it will all be over. Are there any 'other' claims and related discrepencies, that are immediatly attacked or discounted that seem to indicate the same surmise?

Who can you believe anymore?

[edit on 22-7-2004 by smirkley]

U.N. economists warn Russia's prosecution of the oil giant Yukos and its former chairman could drive away foreign investors and hurt the country's economy.

...And more worrisome, it is likely to discourage further investment in oil and gas extraction.

Voice of Russia
"If the investor perception will be that the Yukos affair is not resolved in accordance with the rule of law, this will obviously have a detrimental effect on the investment and business climate in Russia."



The World Bank and a snippet from their most recent report on Russia...
WorldBank Russian Economic Report - June 2004 - External Debt
High oil prices and prudent macroeconomic management, on one hand, and low international interest rates, on the other, have had a noticeable impact on the dynamics of Russia�s external debt. According to CBR estimates, the stock of Russia�s total debt to non-residents increased considerably from USD 153 billion at the end of 2002 to over USD 182 billion at the end of 2003. Almost all of this increase occurred, however, in the private sector with banks increasing their debt by USD 10.6 billion and non-financial enterprises by USD 16.5 billion.


So if oil prices are somehow globally lowered, this could be a big factor on future revenues for the country, especially considering the variables related to Yukos?

Great. See want happens when oligarchs steal the country's money? Well now the Russian economy will go down, jobs will be lost, and it will be like the great depression here. Corrupt. Hope it wont happen.

Originally posted by smirkley
Tell me something, am I looking too deep here and seeing something that isnt happenning?

snip-snip

All within the last few weeks.

It just seems something is brewing in the Russian economy. It is hard to determine with all sides chiming in and much conflicting evidence. I guess when the facts are really out it will all be over. Are there any 'other' claims and related discrepencies, that are immediatly attacked or discounted that seem to indicate the same surmise?

Who can you believe anymore?

[edit on 22-7-2004 by smirkley]

Well i think this is just more international speculation ( speculating against currency is a great geopolitical tool) and here are some links that in my opinion shows things are going far better in the Russian economy than it is in most other places.....

Russia mulls paying $28bln IMF debt ahead of schedule

Reserve assets in Russia's economy grow 8.8% in June.

And some more recent material ....

Money Focus: The war over the ruble.

Stellar