Confidence is greatest casualty of market crisis

October 15th, 2008 - 10:12 am ICT by IANS  

Moscow, Oct 15 (RIA Novosti) In its desperate attempt to rescue Russia’s crisis-ridden financial market, the government adopted a massive rescue package Oct 7, but the measure has done little to shore up business confidence.Apart from the trillions of rubles allocated for short-term and mid-term financing of the banking system, Russia’s largest banks will receive another 950 billion rubles ($36.42 billion) for five years and beyond.

According to the government and central bank’s plan, these funds are to filter down to smaller banks and businesses, which are in acute need of refinancing.

Starting in the US mortgage market over a year ago, the financial crisis has crept all over the world causing a chain reaction of distrust in the banking sector.

To increase financial security, even those American banks that were not affected by the mortgage crisis have tightened credit for home loans, not so mention the European loans. At the same time, the European banks that have stayed afloat are afraid to refinance Russian banks and companies.

Under such circumstances, the billions of dollars(and in Russia trillions of rubles) poured into the leading European countries’ banking systems failed to produce the desired effect yet.

The sense of uncertainty is so strong that the leading financial institutions hesitate to credit smaller banks, which, in turn, cannot re-credit business, or do not want to risk it.

Private customers suffer as well: even Russia’s largest banks have raised interest rates or simply put a limit on issuing credits, especially mortgages.

Unless the global banking system (including Russia’s), which is the monetary circulatory system for the non-financial sector of economy, resumes crediting business, the economic slowdown, and then the recession of economies stricken by the crisis of confidence, will become a reality.

In Russia, it is retailer chains that have suffered the most from the crisis of confidence. Anticipating an ever-growing consumer demand, they purchased large batches of goods on credit. With the credit stream running dry and consumers shying away, retailers found themselves on the verge of bankruptcy.

The most notorious example is the situation with Russia’s largest cell phone dealers.

Euroset, the market leader, was rescued thanks to billionaire Alexander Mamut, who bought it for $1.25 billion. Three fourths of that sum will be spent on buying down the debt of Euroset’s former owners, instead of being transferred to their accounts.

Two other large retailers - Svyaznoy and Tsifrograd - have applied a similar scheme: exchanging a former owner for a large investor. As can be seen, there are still people and companies in Russia that have funds to invest.

To raise extra capital, cell phone retailers had to start charging a commission for processing payments. On the other hand, new investors will help them survive the current crisis, and then they are likely to resell the businesses to mobile operators.

As a result, Russia may convert to the European format where mobile operators sell phones themselves, with prices often discounted.

Nevertheless, it is obvious that the crisis of confidence will not be resolved that smoothly in other economic sectors. It is not only retail chains that have found themselves in debt - Russia’s largest companies have been plagued by the same trouble.

For example, Oleg Deripaska, the richest Russian according to Forbes, lost Canadian auto parts manufacturer Magna, which he had purchased for $1.5 billion on credit. Deripaska failed to pay off his debt, and Magna went to French creditor BNP Paribas.

Because of problems with financing, the GAZ group, part of Deripaska’s empire, reported a one-week halt in GAZelles light commercial truck production. The assembly line stopped because of a drop in GAZ sales, which, in turn, was caused by the deteriorating auto loan market. Moreover, local GAZ dealers stopped making advance payment which is why the car manufacturer now lacks working capital to buy auto parts.

So, it all came around to where it started.

For similar reasons, the Kamaz heavy-duty truck production plant announced a shortening of the workweek from six to four days through December 6.

A cut in car production against the background of the financial crisis is a global trend. Europe’s Opel, BMW and Skoda, as well as US General Motors and Chrysler have all announced a reduction in output.

The magnitude of the crisis is evident from the fact that the Russian government came in rescue of the country’s oil and gas majors - Gazprom, LUKoil, Rosneft and TNK-BP - to pay off their debts to western banks and maintain production.

One might think their coffers had swelled with petrodollars. However, as soon as “black gold” sank below $90 per barrel, Russian oil tycoons desperately turned to the state for help.

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