Russia’s Overleveraged Economy as a House of Cards

Andrew Kramer has a piece in today’s New York Times which examines how so many of Russia’s most wealthy people lost so much money in so little time during the current financial crisis. Not a lot of new information, but some interesting quotes:

If banks require businesses to sell shares to repay these loans, “the Russian stock market could come down like a house of cards,” Michael Kavanagh, a mining sector analyst at Uralsib bank, said. “This could be a game changer for a lot of very, very large players,” Rory MacFarquhar, an economist at Goldman Sachs in Moscow, added. “The ground is shifting under them.”

Not all of Russia’s rich are hurting. Their yachts, jets and London mansions are not yet up for sale. For instance, Roman A. Abramovich, the owner of the Chelsea Football Club in London, has not sold his 377-foot yacht, Pelorus. Or the 282-foot Ecstasea, his other yacht.In the 1998 financial crisis, ordinary Russians lost savings in a devaluation of the ruble. This time is different. The wide middle class that emerged under the former president and now prime minister, Vladimir V. Putin, and the oil boom has yet to feel the financial turmoil, because few own stocks. That could change depending on how badly the economy is hurt by falling commodity prices and the flight of an estimated $74 billion in foreign investment since Aug. 1.Estimates of the oligarch’s losses are necessarily rough. Bloomberg News calculated the richest 25 Russians on the Forbes list lost a collective $230 billion since the market peak, based on declines in value of publicly traded companies and analysts’ estimates of private company losses. That would make their collective loss over five months four times greater than the total wealth of Warren E. Buffett.The oligarchs’ remaining assets, based on this estimate, would be worth about $140 billion.In a more narrow sampling, Forbes magazine on Sept. 22 estimated that the loss for 10 oligarchs whose wealth was primarily in public companies totaled $42.75 billion, or 34.1 percent of their estimated worth on Jan. 1.Vladimir S. Lisin, the steel magnate, led the list with a loss of $11.21 billion on declining share value at his company, Novolipetsk Steel.Spokesmen for Mr. Deripaska and Mr. Abramovich brushed off estimates based on gyrating stock prices as misleading, noting that the paper gains at the market peak were just as provisional as the losses today.But the Moscow office of UniCredit, the Italian bank, said Mr. Deripaska; Mikhail M. Fridman, a partner in a conglomerate with telecoms, oil assets and grocery stores; and Vladimir P. Yevtushenkov, who owns a cellphone company, real estate and retail businesses, are at risk from overstretched credit backed by tumbling shares.UniCredit, with liquidity problems of its own, has turned to Libyan government investors for a cash infusion.Mr. Deripaska, who, like Mr. Abramovich, was an orphan and a driven young man, achieved unimaginable wealth in the chaos of the immediate post-Soviet period, seizing on the windfall profits of the commodity boom to begin a global expansion. He built his empire on debt.Mr. Deripaska and Mr. Lisin, the steel tycoon, are seeking bailout loans from the state for an undetermined amount. The government has set aside $50 billion from its rainy day fund, made up of oil revenue, to aid struggling businesses.The rules under Mr. Putin as understood by all players after the incarceration of Mikhail B. Khodorkovsky in 2003, suggest a strict quid pro quo of government largess in exchange for fealty and payments to Kremlin pet projects.Mr. Deripaska has been on both ends.