Putin the Panhandler

Dmitri Sidorov, Washington bureau chief of the Kommersant newspaper, writing in Forbes magazine:

Russian Prime Minister Vladimir Putin came to the World Economic Forum in Davos, Switzerland, it seems, to convince Western creditors to write off a portion of the debts Russian companies owe them. As of October 2008, the cumulative debt totaled $540 billion. The State of Russia owes $42.7 billion, while the private sector carries the rest of the burden. In the fourth quarter of 2008, the State of Russia paid foreign creditors a total of $80 billion, including $61 billion owed by the private sector.

We know that the Kremlin recently drew up a list of strategic enterprises belonging to Russian companies that owe money to Western banks. Stakes in these enterprises either cannot be sold to Western investors or are tightly controlled by Moscow for the lucky few allowed in. The Kremlin based its rescue plan for the Russian economy on this list, which consists primarily of monsters like Gazprom, Rusal, Rosneft and others.

But even if official Russian statistics on the state of the country’s gold and hard currency reserves are accurate–and they came to $386.9 billion as of Feb. 1–if prices for commodities and energy exports remain unchanged and capital flight stays at current levels, by December 2009 this figure could shrink to $150 billion. And don’t forget that over the last six months, Russia’s reserves fell by $210 billion.

What happens next if the crisis goes on a bit longer requires little explanation.

Russia’s government will have increasing difficulty paying the debts of these companies, layoffs will go from episodic to epidemic, and the government will be unable to maintain social programs. The result could easily be a coup that brings the “conservatives” around Putin, and not the “liberals,” to power.

Such a turn of events would be a nightmare for both Washington and the Europeans, who fear that the familiar, albeit authoritarian, regime in Russia could morph into something much less predictable. For all their dislike of the current regime, the White House and the Europeans feel that, one way or another, they can mollify and manage Putin. The Kremlin’s current straits are a help. If Putin was counting on this when he came to Davos, he had reason to do so.

For my money, only a request to write off the debts of Russian companies explains the Russian prime minister’s appearance at the Economic Forum, which he has always treated with poorly concealed disdain. Putin’s visit was his first in nine years. In his eight years as president, he didn’t come once. Sources in Moscow say that Putin constantly dissuaded his subordinates from attending.

Putin may have formed a negative impression after his first trip to Davos, in 1995, together with Anatolii Sobchak, then mayor of St. Petersburg. A source in Moscow insists that Sobchak and Putin were treated insultingly. Which is plausible enough if one considers that Klaus Schwab, the founder of the Economic Forum, has made it clear to many a politician that he considers Davos to be primarily a financial and banking forum.

This time around, Schwab seemed eager to take a jab at Putin. He not only introduced him as the “president” of the Russian government but managed to slip in references to the war with Georgia (with a phrase about Russia’s attitude toward its neighbors), the “gas war” with Ukraine (with a mention of European energy security), and the lack of diversification in the Russian economy (with a nod to Russian domestic development).

In any other setting, Putin would never pass up an opportunity for a harsh response to a perceived slight. He leaped at the chance in Munich, Germany, in 2007, nearly setting off a new Cold War.

This time the Russian premier spoke calmly of the need to reduce government control over the economy. He even bit the bullet when Bill Clinton joked about his commitment to the free market.

Putin’s reserve makes sense if he did, in fact, come to Davos to resolve the issue of Western loans to Kremlin companies. Another row with the West could have put paid to the plan.

The political factor–a less frightening future for Russia–would undoubtedly have made an impression on Putin’s interlocutors. One of them was Clinton, who gained fame for his ability to extract loans from the International Monetary Fund and the World Bank for President Boris Yeltsin, although Russian officials made off with most of the lucre.

The economic component of Putin’s talks was no less important. Information I received from Moscow indicates that in exchange for a debt write-off, Putin may have offered Western financial institutions a chance to work in Russia’s retail banking sector and gain a stake in the oil industry.

If the sources are correct, Western creditors should treat the offer with maximum care. They should remember that the Kremlin and its stable of domesticated oligarchs can create headaches for them at any moment, and kick them out of banking as easily as they can evict them from oil. The experiences of Exxon Mobil (nyse: XOM – news – people ) in Sakhalin and BP (nyse: BP – news – people ) in Moscow are far from the only examples of how far the Kremlin is willing to go when relations with the West go south.

Now, however, the Kremlin seems to be asking for favors. It might not be possible to say no, but that doesn’t mean you shouldn’t try to hold out for a better deal.

2 responses to “Putin the Panhandler

  1. I say, let the hardliners coup. It would mean a final capital flight from Russia, with all the collapse that entails.

  2. This from the BBC:

    Russia denies foreign debt plan

    The Russian government has denied press reports that the country’s banks want it to help them restructure $400bn (£269bn) of their foreign debt.

    “There are no such plans in the government,” said a spokesman, who added that the article in a Japanese newspaper “does not reflect reality”.

    Despite the denial, the rumour has hit the value of the euro, as European banks are most exposed to Russia.

    In Tuesday trade the euro was down 0.7% against the US dollar at $1.2917.

    Source: http://news.bbc.co.uk/2/hi/business/7880532.stm

    Of course they are denying it, but I you are right in that Putin’s appearance at Davos was in preparation for the coming default whereby Russian companies and banks (many/most owned, partially-owned or controlled by the Russian state) will refuse to repay monies they owe.

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