By Karl Spain
My blog has focused on Russia and Europe a lot this year, if this doesn’t interest you, I apologize, it’s just a lot is happening there, of great importance.
I’m going to quote extensively now from a piece published today about the Russian banking system. It’s important to read and understand this piece, because in my opinion, a study of a country’s banking system is a very instructive tool when studying the periods that lead up to major and even minor wars, or, an alternative title I considered for this piece; Banks and Borders Cause Wars.
This is from The Moscow Times, By Howard Amos, and Delphine d’Amora Jan. 17 2015 18:0 dateline: Moscow.
“The head of Russia’s largest bank, German Gref, offered a bleak picture of the fate awaiting the country’s banking sector in 2015 during the set piece Gaidar economic forum in Moscow this week.”
“It’s obvious that the banking crisis will be massive,” the Sberbank chief told reporters.
“The state will capitalize the banks and increase its stake in them, and the banks will buy industrial enterprises and become financial-industrial groups,” Gref said Wednesday. “All our economy will be state-run.”
That floored me. If it doesn’t floor you read up on 1929. The article continued with stuff every bit as breathtaking.
“The warning from Gref, a former Minister for Economic Development and a prominent economic liberal, is not the only prediction of approaching stress for the country’s financial system. Amid a deepening recession and the collapse of one of Russia’s top-30 banks late last year, many analysts are urging banking executives and government regulators to prepare for a crisis that could be as bad, or worse, than that which engulfed Russia in 2008 and 2009.”
Mind you, this isn’t one of Putin’s supposed enemies talking this stuff; this guy is the head of Russia’s largest bank. Why is he so sure they are headed for doomsday? Because he’s educated, and smart — and fundamentals don’t lie. The story explains:
“High interests rates — currently at 17 percent — and the pressures of a recession are already intensifying competition among banks for a shrinking pool of clients and good assets, while Western sanctions imposed for Russia’s role in Ukraine restrict the ability of Russian banks to borrow abroad.”
“We are already in a crisis,” said Oleg Solntsev, the head of banking and monetary policy research at the Center of Macroeconomic Analysis and Short-term Forecasting in Moscow.
Putin is not an economist, it’s his weakness, and it’s showing. As the story goes on to painstakingly explain, these fundamental indicators, upon which even the toughest ships bow will break, have turned against Russia.
“There are several different measures usually considered the threshold for announcing a banking crisis, according to Solntsev, and Russia already fulfills at least two of them: State support for the banking sector has exceeded 2 percent of gross domestic product and deposits are contracting. Solntsev gave a thumbnail sketch of the likely progression of events: a growing squeeze on credit that pushes banks toward insolvency and an increasingly unstable situation that provokes macroeconomic problems. Finally, at the nadir, panic emerges among the population and runs on banks become possible.”
“The speed of the crisis will depend on two key factors: the situation on the oil market … and the behavior of the Central Bank,” said Solntsev, who predicted a stabilization might take place only in mid-2016.”
The graph above says it all, when oil prices fall, the Russian economy contracts. When it falls a lot, the economy contracts a lot. When the economy contracts a lot the banks fail, the economy tanks worse and people get hungry, unemployed, angry.
I think we’ll be at war before 2016 if things continue on this course. If Putin doesn’t see how bad this has become for his people, he’s just so blind.
What can his leadership do for the economy if the banks are failing?