Wherever one looks, debt epidemiology is apparent – and growing.
The Vologda Oblast (Oblast = region) is located in the northwestern part of Russia. It’s about 500 km from the Kremlin, or roughly halfway to Finland, but like you, I’d never heard of it until just now….when S&P downgraded its credit rating from from B+ to B.
Now I realise that these everyday releases from Standard & Poor are usually ignored (“Quick, I’m getting over-excited, give me an S&P downgrade”) but there is a degree of significance to this one. It’s reflective of a growing problem among large countries with Big State control from the centre.
In February this year, the Beijing government got itself into a pickle after a regional-lending binge involved writing off nearly three times the cost of the US bank bailout in 2008. As I keep saying, China is very big. But Russia is bigger. And there is something about long distances that encourages the telling of porkies when it comes to borrowing public money at advantageous rates…or from British banks who have had their brains removed. Yes, we’re talking RBS again.
‘Vologda Oblast’s financial performance in 2011 was worse than we anticipated, due to constant spending pressure, and its debt now exceeds our base-case forecast,’ wrote S&P kindly, adding, ‘The oblast’s free cash balances remain weak, which under high debt service obligations, have strained its liquidity and heightened refinancing risks‘. This is the sort of credit-rating terminology that leads alarmingly quickly to, “Sod the women and children, head for the hills’.
Thus, S&P’s ‘The ratings on Vologda Oblast are constrained by revenue volatility stemming from its high concentration in the steelmaking industry‘ is another way of saying ‘All they do is mine and refine iron, and the world is heading for the biggest industrial recession in history’.
But as with China (which is itself engaged in the fastest slowdown in history) the departure of the good times never quite seems to get between the ears of the bankers and local bureaucrats until it’s too late. The ‘R’ in brics, as Jim O’Neill would be happy to tell you, stands for ‘Russia’. For years, Russia has been put up on a pedastle as one of the emerging former-Commie tigers. But Russian business ethics and regard for the law make those of Zimbabwe glow by comparison.
RBS has had a huge exposure to corruptly obtained Russian loans over the years. I’m not sure how much of the toxicity Hester has managed to dump, but up until early 2011, a fair amount of it related to businesses, factories and dachas that existed more in the imagination of borrowers than on the Russian steppes. The former fiefdom of Freddie Badloss was pushed into the red after the first half of 2011 by a £733 million hit on its exposure to Greece’s debt-laden economy, and an £850 million provision to cover compensation for customers who were mis-sold payment protection insurance.
Following from earlier this week and today on the subject of mutlivariate bank exposure, RBS falls very much into this class: it isn’t that heavily exposed to Sovereign debt in troubled countries, but its levels of personal, community and business loans are significantly higher. The Russian Federation is massively dependent on industrial materials and oil energy for its revenues. We are entering an era when the demand for those things is going to be patchy at best. Tweedle-Dum and Tweedle-Dee in the Kremlin face a Troika of threats from truculent hard-up citizens, the Mafia, and
post-Communism oligarchs. It’s time to get real on this issue: Russia is an unstable country ruled in a Wild West fashion by unpopular people, and their popularity is going to be further diluted by global depression.
The feedback I get from there (hardly anything these days since they banned me – so come on reformist Muscovites able to avoid the ban – email@example.com) suggests that some regional spending is out of control. A Kremlin starved of energy income would be hard-pushed to bail them out: it isn’t mega-rich Beijing. That in turn would lead several such places to default….probably taking the Scottish end of our banking system with it.
It was on the basis of thinking like this that The Slog ditched his RBS gold tracker last year. “The balance sheet continues to be derisked,” says Stephen Hester. But of all the big banks, it was the only one to miss the government’s Merlin targets of lending to small business. Now it has emerged it was engaged in selling dodgy swap deals to small enterprises…here and there. Oh and, um, everywhere.
The truth is that an enormous amount of toxicity is still in there, and the Government has been doling out fees left right and centre in a vain bid to dump the Freddie Legacy on some usnsuspecting bugger a long way away. We own the Caledonian off-white elephant to the tune of 83%. Don’t be silly enough to assume that someone in Camerlot or at the Treasury is on the case: they aren’t.