Great Recession in Russia
The Great Recession in Russia was a crisis during 2008–2009 in the Russian 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 Russia's underlying structural weaknesses and high dependence on the price of a single commodity made the crisis' 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 oligarchs 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 planned to sell shares in companies that were already publicly traded, including Rosneft, the country's biggest oil producer.
From July 2008 – January 2009, Russia's foreign exchange reserves 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. Experts expected that Russia's economy would 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, and Organisation for Economic Co-operation and Development respectively.
Background
Russia is a major exporter of commodities such as oil and metals, so its economy had been hit hard by the decline in the price of many commodities. The Russian stock market declined significantly. Foreign investors had 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 Putin'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 appeared to be bound for write-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, a conspiracy theory circulated within Russian leadership that the U.S. government had incited American investors to withdraw their capital from Russia, in punishment for the war in Georgia.
Financial markets
Stock markets
On 24 July 2008, Mechel'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 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".
On 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. 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.
Money markets
The crisis in money markets 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 collateral for the repurchase agreements, 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 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. 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 contracts fluctuated at 40–60%, short-term currency swaps averaged around 80% as the banks anticipated further drop in exchange rates.