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Russia’s Rescue of Iceland

I’ve exchanged comments with Andy over at the always excellent Siberian Light about the possible loan of more than $5.4 billion to bail out its rapidly failing banking sector. The question on everyone’s mind is whether or not such a large loan might include access to a military base in this strategically important NATO country, or whether they will get some support in terms of their territorial claims in the Arctic. Or maybe there is no nefarious political imperative, and the media is making a mountain out of a molehill. The Canadians, who have shown some aggressive responses to Russia’s arctic shenanigans, tend to view the Iceland loan with a good dose of cynicism. From Brian Milner in the Globe and Mail:

For months now, Iceland has been the problem child of the industrialized world. Now this island of 320,000 people in the North Atlantic has become the poster child of the new dark age of global finance. Faced with the very real danger of financial collapse after being frozen out of the credit markets, an increasingly desperate Icelandic government yesterday seized the country’s second-largest bank, Landsbanki; pumped fresh capital into the biggest one, Kaupthing Bank; pegged its currency, the krona, to the euro in an effort to stem its nosedive; and revealed that it has lined up an emergency infusion of €4-billion ($6.03-billion) from a most unlikely source – Russia.

It’s the latest dramatic challenge facing an economy that has been derailed by soaring inflation, skyrocketing interest rates on heavy debt, a crumbling currency and the ever-worsening global credit crisis.”We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy,” Prime Minister Geir Haarde said in explaining the coalition government’s dramatic intervention.Reykjavik had sought financial help from other European governments and the United States without success, said people familiar with the central bank’s efforts.But the Russian deal, which has not yet been signed, still came as a surprise, not least because of Russia’s own financial system’s well-publicized plight. Nevertheless, with more than $500-billion (U.S.) in foreign exchange reserves, the Kremlin can afford the gesture, analysts said.”It’s rather imaginative of the Russians and the Icelanders. They should have done it earlier,” said Richard Portes, a professor of economics at the London Business School and an authority on Iceland’s financial system.”It should bring the Europeans to realize that it wasn’t so smart of them to simply let Iceland float.”