Is there some wild card out there that could make the global economic mess even worse?
For months now, my attention has focused on Russia. The country is big enough, and its problems serious enough, that it could take the global crisis to a new level of danger.
The good news is that Russia is in much better shape than it was the last time it shuddered into crisis, in 1998. The bad news is that Russia's current problems bear an eerie resemblance to those that took the country into default, led to the fall of a once-popular political leader and forced the U.S. Federal Reserve to organize a bailout in order to prevent a panic in the global financial markets.
Let me quickly summarize the last crisis:
- In 1998, a worldwide financial crisis that started in Asia led to a collapse in demand for oil, natural gas and nonferrous metals, which formed the foundation of the Russian economy.
- The prices of oil and other commodities plunged, which left banks that had made huge loans to oil or mining companies (or to investors who had pledged shares of those companies as collateral) teetering on the edge of insolvency.
- Despite government efforts to defend the ruble, the Russian currency went into free fall.
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- The Russian stock, bond and currency markets collapsed when domestic and overseas investors delivered a devastating "no confidence" vote by refusing to buy ruble-denominated bonds despite yields of more than 200%. Russian stocks lost 75% of their value from January to August.
- With inflation running at better than 80% and food prices up 100%, Russians took to the streets in protests that eventually brought down the government of Boris Yeltsin.
- Russia then defaulted on its ruble and dollar debts, leading to the failure of the Long-Term Capital Management hedge fund after losses of $4.6 billion in less than four months. To prevent a panic in the financial markets, the Federal Reserve stepped in to organize a bailout of the fund.
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On Sept. 16, the government suspended trading on Russia's stock exchanges for an hour after the worst one-day fall since -- you guessed it -- 1998. Despite words from the finance minister assuring investors that there was no systemic crisis, trading had to be suspended again Sept. 17 and 18. The Russian stock market fell 19% on Oct. 6 and an additional 14% on Oct. 9.
Banks that had made huge loans with shares of energy and mining companies as collateral teetered on the brink of insolvency, as they had in 1998. However, in the 1998 crisis, the Russian government lacked the financial resources to act. As 2009 begins, the country's coffers are full after a decade of climbing energy prices. Russia's reserves stood at $600 billion in August, so the government has been able to move aggressively.
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The economy's real problemThe money that the Federal Reserve and Treasury are giving away is going right back to the Fed. The financial fixes haven't worked, Jim Jubak says, because banks aren't lending out the money.
In September, the government lent the country's three biggest banks $44 billion. That same month, the government injected $20 billion into the financial markets and then lent an additional $110 billion to the country's banks. October brought $36 billion more in loans to banks.
To head off runs on those and smaller banks, the government raised the limit for deposit insurance to $25,000. As in the U.S. crisis, even after an injection of liquidity from the government, Russia's banks refused to lend to each other. Interest rates on interbank loans climbed to 23%. Nine banks had failed by the end of November. The government allowed others to keep operating, even though they were insolvent.