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Paul Holmes · Lounge Wizard Joined: 12 Apr 2005 Posts: 1011

A tense quiet precedes Kremlin's big move

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DOUG SAUNDERS

From Wednesday's Globe and Mail

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October 28, 2008 at 9:38 PM EDT

MOSCOW — A month ago, the aisles of the gold-encrusted Okhotny Ryad mall near the Kremlin would have been packed with Muscovites on any weeknight. On Tuesday night, there were more security guards than window-gazers, a handful of whom fondled the threads from Zara, Fendi, Diesel and Tommy Hilfiger.

And a table at the exclusive Vogue Café, which used to require reservations weeks in advance, was a simple request: “We have room on Friday night,” the maitre d' says.

“People just aren't going out this week. It's quiet.”

Nobody's buying anything in Moscow this week, including shares.

The RTS and MICEX stock exchanges finally opened Tuesday morning, after Moscow authorities halted trading on Friday following a calamitous crash that erased more than 74 per cent of the value they held at their May peak – making Moscow arguably the world's most insecure market in the current global crisis.

The markets opened Tuesday to slight gains, but trading volumes were very low, and it was widely reported here that Kremlin authorities were behind much of the buying – a suggestion supported by the fact that many of the same companies were trading at much lower prices on London markets.

“The entire economy is holding its breath, waiting for the next thing to happen,” said Anton Stroutchenevski, senior economist with the Moscow investment bank Troika Dialog.

Most of Moscow's potential investors – not to mention shoppers and diners – appear to be waiting until Thursday night, when President Dmitry Medvedev will finally deliver an annual state-of-the-nation speech that he has postponed at least twice because of financial turmoil.

Investors hope he will announce a major program to invest part of Russia's oil reserve fund, valued this summer at almost $200-billion (U.S.), into preferred shares in some of Russia's largest banks and resource companies.

By a Bloomberg estimate, the oligarchs who control these companies have lost $230-billion, or 62 per cent of their net worth, in the stock market crash.

As a result, they are now facing demands from foreign lenders to put up cash or equities to cover loans that often total billions of dollars. Oleg Deripaska, who recently ranked as Russia's wealthiest oligarch, has until the end of this week to refinance a syndicated loan to Western banks valued at $4.5-billion.

If a Kremlin-funded buyout of the firms were not possible, large parts of these enterprises could fall into foreign hands – something that Russia's leaders have considered unthinkable.

“What we've got ourselves today in the Russian market is almost a perfect storm,” says Ronald Smith, chief strategist for Alfa Bank, Moscow's largest commercial bank.

But it is not clear exactly which, if any, companies might face a government refinancing. This has led those few Russian investors with cash available to sit on their hands and wait until Thursday night's news.

It has also led to widespread rumours that the Kremlin will use its investments as a way to further consolidate its control over the Russian economy by taking large state shares in the economy.

On Monday, Deputy Prime Minister Igor Shuvalov tried to reassure investors that a large-scale state takeover of the economy was not pending.

“We don't have any directives to lay our hands on as much private property as possible – these are all rumours,” he said in a rare media briefing. He added that government managers would not be imposed on companies: “There are no worse managers than the state.”

Moscow's mood of terrified indecision was captured this week by the magazine Snob, a “journal for the very rich” that costs $20 an issue.

Its October cover, in a break from its usual bling-encrusted models, features a stark image of a fashionable young man slumped on the ground, his hands covering his face in fear.

Actually, that might be the mood of the magazine's owner, the mining oligarch Mikhail Prokhorov, whose company MMC Norilsk Nickel has seen its shares plummet from a high of over $300 (U.S.) in May to a close of $58.25 yesterday.

That collapse is at the heart of the difficult choice facing Mr. Medvedev on Thursday. After all, Mr. Deripaska used his control of a 25-per-cent stake in Norilsk as collateral to guarantee his $4.5-billion loan. With the value of that collateral greatly diminished, banks are demanding that he find $2-billion in cash or equities to restructure the loan.

While it is considered highly likely that Mr. Deripaska will be saved by the state, it is not clear what other institutions might get a rescue. Several mid-sized banks and finance firms have already failed, and Mr. Medvedev has made it clear that he will allow others to fail.

“The state has the resources to save those companies that it wishes to save,” Olga Kryshtanovskaya, an economic analyst with the Russian Academy of Sciences, told reporters.

“These will mostly be large state corporations and companies that are friendly to the Kremlin.”

Paul Holmes · Lounge Wizard Joined: 12 Apr 2005 Posts: 1011