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15Sep11
Roubles to the rescue? Forget it, euro zone!
Sickly European economies and their capital-starved banks can forget the prospect of quickly receiving significant special help from reserves-rich Russia.
The country's finance ministry, its biggest bank, and some experienced Russia investors all gave the idea the thumbs down at the Reuters Russia Investment Summit.
This is despite investment bank exhortations to buy cheap equity in western financial institutions, and an idea floated by Brazil that it and fellow emerging powers Russia, China and India should buy bonds to shore up a region whose debts look increasingly difficult to service.
"If they extend the financial stabilization mechanisms, and there will be eurobonds in that, we are happy to participate in that," Finance Minister Alexei Kudrin told the summit at the Reuters office in Moscow.
But he made clear there were no discussions taking place with major euro zone countries on specific bond purchases and underlined the importance of Russia's cash cushion.
On Thursday, one of Kudrin's deputies and the country's top financial diplomat said he had been unaware of a Brazilian plan for BRIC countries to discuss extra buying of euro zone bonds at a meeting on September 22.
"There had been no preliminary talks," Sergei Storchak, Moscow's sherpa to the International Monetary Fund and the Group of Eight most industrialized countries, told Reuters in an interview. "It was all news to me."
Big Exposure
Russia's exposure to euro zone debt is significant already.
It has done well from the commodities boom of the past few years and has $540 billion in foreign exchange and gold reserves. More than 90 percent of it is in sovereign paper, according to official figures, and of that, 42.5 percent, or more than $200 billion, is already in euro zone debt.
"That means that we continue to invest in the euro all the time," said Storchak. "Isn't it enough?"
So although Russia has enough to pay off the entire 340 billion euro ($465 billion) sovereign debts of the euro zone's sickest country, Greece, the prospect of it putting in any more than it has to under International Monetary Fund commitments looks fanciful.
"I think a certain amount of that sort of action ... might be appropriate as part of a diversified reserve management policy, but do I want to see them moving huge amounts of reserves into propping up the euro zone system? I am not sure I would see that as a particular positive," said David Reid, who helps manage the $2 billion Emerging Markets fund of BlackRock, the world's largest asset manager.
Russia's finance chiefs live in perpetual fear of a dip in the oil price. With crude exports the mainstay of its economy, Russia needs an oil price of $116 a barrel next year to balance its budget, while most indicators suggest a figure much lower than that.
"Probably the most important thing for Russia to do is to maintain the prudent and stable reserves management policy it has had over the last 10 years or so," said Reid.
"Don't forget this was the policy that effectively saved Russia in the last episode of the financial crisis in 2008-2009," when it used reserves to maintain confidence and liquidity in its own banks.
"There were no banking failures of any real size in Russia, and those banking failures that there were, were managed very well," Reid told the summit.
Bank Equity
So if direct purchases of risky sovereign debt is out of the question, what about buying on the cheap into those banks whose exposure to such bonds are threatening to bring them down?
A strong Russian bank could buy into a weak euro zone one at a price that would have been considered impossibly cheap just months ago.
"I am advising investors to look in this direction. However, they are scared. I think it is between greed and fear. And for the moment, fear is outweighing greed," said Igor Lojevsky, the head of Deutsche Bank's Russian and CIS investment bank operation.
State bank Sberbank (SBER03.MM), now the third largest by stock market value among Europe's shrunken banks and the industry leader domestically, with 50 percent of deposits, is the prime candidate.
It certainly has the capital to buy a stake in one or more of its struggling euro zone rivals.
But Chief Financial Officer Anton Karamzin said any acquisition outside his immediate area of interest in eastern Europe was out of the question.
"Western Europe never has been part of our strategy, regardless of what shape the European banking system is in," Karamazin told Reuters Insider television in a summit interview, citing better returns on equity at home.
Fund managers are also not keen on the idea.
"I think from a stock market point of view, the companies are unlikely to be rewarded for moving into the European market, simply because the return on equity that you would expect to receive from such a venture would be considerably lower than the cost of equity you would normally attribute to Russia," said BlackRock's Reid.
"So I would see that as a value-diluting move unless they can get some kind of incredible deal."
So what can euro zone countries do to help themselves?
The view from the summit is grim. "The EU economies would benefit from an equitable sacrifice," said Sberbank's Karamzin. "They need to adjust the level of consumption and spending to reflect more adequately the economic situation."
Easier said than done. For governments dependent on the popular vote, unpopular policies are tantamount to the counsel of despair from Russian metals tycoon Vladimir Potanin: "If I was a politician in Europe, I would commit suicide."
($1 = 0.731 Euros)
[Source: By Andrew Callus, Reuters, Moscow, 15Sep11]
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