Russian economy unable to cope in credit crunch

A year ago, Yevgeny Chichvarkin was the very picture of Russia's rollicking vanguard of young millionaires in a nation of seemingly endless stacks of cash and lines of credit.

The 34-year-old's cell phone company, Euroset, began with one retail shop in 1997. A decade later it had an annual turnover of more than $4 billion. “During the first eight years we didn't count money,” Chichvarkin said in a recent interview. “If we counted money we would never have done what we did.”

But last month, they had to start counting – and there wasn't enough. So he and his partner sold the firm for a reported profit of $400 million, a tenth of its annual business.

Chichvarkin said they sold the company because of worries that they couldn't find a bank willing to refinance Euroset's loans. While he wouldn't detail the sale price, other than to say it was far less than he could have gotten earlier in the year, the Russian press has said that the $1.25 billion deal included the buyer assuming some $850 million in debt.

It's just the latest example of Russia's Wild West business environment at a time of international financial crisis. Known for its light government regulation and widespread corruption, Russia's economy has been unable to cope with the tightening of credit, leading to the fire sales of banks and firms. The upheaval also raises serious concerns about the government's ability, or perhaps willingness, to bring transparency to its financial system.

Prime Minister Vladimir Putin announced late last month that $50 billion would be allocated to Russia's development bank, VEB, to help refinance the country's debt-laden companies and banks; VEB's chairman said Monday that he'd already received requests beyond that amount. Among them was VTB, Russia's second-largest bank, which is looking for a loan to help with its $11.4 billion in foreign financial obligations through 2009, according to Russian news wires.

The liquidity shortage is directly linked to the crashing Russian stock markets, which have lost some 60 percent of their value since May, making them among the worst performing markets in the world recently. On Wednesday, the Russian government again suspended trading on the RTS and MICEX markets after steep losses.

“Many banks lost their capital on the market,” said Pavel Medvedev, a member of Russia's national banking council and the deputy chair of a committee on financial markets in the lower house of parliament. “The government and the central bank were afraid of panic and … tried to find buyers.”

Medvedev pointed to three recent examples of banks that he said had faced shortages of capital:

The owners of one of the country's largest investment banks, Renaissance Capital, said late last month that they were selling half of the company for $500 million.

Shortly after, Russia's state development bank, VEB, said it was going to buy a 98 percent stake in the troubled bank Svyaz, which had 49 branches across the country. It paid a symbolic price of 5,000 rubles, about $190.

Two weeks ago, two government-run companies announced a deal to purchase 90percent of another leading investment bank, KIT Finance, for a reported 100 rubles, less than $4.

Because of Russia's opaque business practices, it's difficult to know exactly what happened at the three banks that have been sold so far or whether others face similar scenarios. Deals are announced in vague news releases, and details surface through official or state-friendly news agencies.

On the open markets, there was evidence of rampant speculation.

Underneath much of the sell-off and resulting losses on the RTS and MICEX, analysts say, were indebted investors and firms facing “margin calls” to come up with more money to back their loans.

Speculators had borrowed money to buy stocks, convinced that the shares would continue to skyrocket and they'd be able to pay back the loans and make large returns. Public companies in turn used their high stock-market values to secure bigger lines of credit.

“Margin calls were a major driver,” said Anton Stroutchenevski, a senior economist at Troika Dialog, a leading Russian investment bank.