Economic Sense: TARP Russian Style
Politicians and banks alike never call a spade a spade or a bailout a bailout. In the United States in 2008, the $700 billion bank bailout was called “Troubled Asset Relief Program.” In Russia in 2014, the $1.8 billion bailout for VTB Bank was called a “subordinated deposit.”
The plain fact of the matter remains: One of Russia’s biggest state controlled banks just received $1.8 billion from Russia’s $80 billion National Wealth—read: oil money—Fund and it is very unclear whether or when this money has to be paid back.
It is also unclear what exactly the money is for, although VTB bank stated on its website it will be used for “sustainable infrastructure projects.”
One thing we know for certain. VTB was slapped with Western sanctions and therefore has a hard time getting its hands on dollars or euros.
This is a problem if the bank owes money in dollars or euros and can’t pay it back because it cannot get a new loan in the same currency.
If that was the case, the transfer from the national wealth fund should be denominated in dollars and euros. According to the VTB it is denominated in rubles and to be used for ruble denominated infrastructure projects.
It is far more likely the falling ruble is indirectly responsible for the capital infusion. The ruble, which almost hit 70 against the dollar (down 53 percent since the beginning of 2014) forced the central bank to jack up its overnight refinancing rate to 18 percent annually, a rate normally reserved for banana republics in hyperinflation mode.
This rate offers ruble investors a higher return and theoretically gives them an incentive to buy rubles. However, this move seldom works because the losses on the currency conversion can wipe out 18 percent earned over a year in a single day.
It is the side effects, which are more predictable and happen more frequently in practice rather than theory. The banks have to pass on the high interest rates to consumers and businesses, killing off many a project that would be perfectly feasible at lower rates, thereby crushing economic activity.
Russia has been teetering on the brink of recession for the last couple of months and its economy will contract more likely than not in 2015.
So in order to keep the high rates and defend the ruble but at the same time realize projects needed for economic growth, Russia is pushing capital into the economy from its oil savings at lower rates through its state-owned banks.
VTB will lend out the money for infrastructure projects and therefore stimulate the economy. However, this is nothing but a short-term fix. Unlike TARP, which rid banks of illiquid positions in residential real estate loans and improved its risk-weighted capital structure, this money will be used to fund state supported projects only, bypassing the market mechanism.
While the volume of the stimulus program is relatively small, state investment around the world is usually less productive than its private counterpart—a lesson Russia should remember from its communist days.