Russia: worse than 1998?

Art Cashin is on the record, saying yesterday this is not like 1998 all over again.

Really? 2:47AM, this comes across the tape:

“We couldn’t imagine what’s happening in our worst nightmare even a year ago,” Shvetsov, who oversees financial markets at Bank of Russia, said yesterday. He said the surprise interest-rate increase in the middle of the night, a 6.5 percentage-point move that failed to stem the run on the ruble yesterday, was a choice between a “very bad” option and a “very, very bad” option. Russia Crisis Hits Pimco Fund, Wipes Out Options

Then at 3:15AM Eastern time, Interfax and Bloomberg report that the Russian Finance Ministry has started selling its foreign currency stock.

Not again

We’ve seen this movie before, and if anyone’s memory needs refreshing:

The Exchange Rate and the Peg
When the ruble came under attack in November 1997 and June 1998, policymakers defended the ruble instead of letting it float. The real exchange rate did not vary much during 1997. Clearly a primary component of a currency crisis in the models described here is the central bank’s willingness to defend an exchange rate peg. Prior to August 1998, the Russian ruble was subject to two speculative attacks. The CBR made efforts both times to defend the ruble. The defense was successful in November 1997 but fell short in the summer of 1998. Defending the ruble depleted Russia’s foreign reserves. Once depleted, the Russian government had no choice but to devalue on August 17, 1998. A Case Study of a Currency Crisis: The Russian Default of 1998, St. Louis Fed

And this time, it could be worse for investors who have been madly chasing yield in corporate bonds:

With investors selling Gazprom bonds and other Russian securities, emerging market analysts say that the pressure has already spread to Petrobras, which is enmeshed in a corruption scandal, and to Pemex, where the fear is that the oil price collapse will lead to a serious slowdown in Mexico.

. . .

dbpix-emerge-gfx-blog480

“There is a whole feedback loop here,” said Daniel Tenengauzer, an emerging markets expert at RBC Capital Markets in New York. “Emerging markets are clearly a problem. The dollar is going higher, and everything else is going lower.”

While Gazprom bonds have been popular among bond investors, Mr. Tenengauzer pointed out that the bonds of Petrobras and Pemex are even more widely held. As a benchmark, he cited BlackRock’s exchange-traded fund that invests in these types of securities. Petrobras and Pemex are the top two holdings in the fund, accounting for 9 percent of total assets.

. . .

Since 2009, Petrobras, Pemex and Gazprom (along with its eponymous bank) rank No. 1, 2 and 3 in selling emerging market bonds to investors — $140 billion in total, according the research firm Lipper. During this period, emerging market companies over all sold $1.7 trillion bonds, a benchmark high.

Petrobras has been the most vivid example of this bond frenzy. It sits on $170 billion in debt, making it by some estimates the most indebted company in the world. Like its Brazilian counterpart, Pemex, too, came to rely on global bond investors.

. . .

And Russia — even with all its political risk — has also been able to steadily tap the global bond market over the years. Lipper calculates that Russian companies such as Gazprom, Rosneft and its major banks, among others, have sold $244 billion worth of bonds since 2009. By comparison, the Russian government has been fairly prudent, issuing just $55.6 billion.

Now investors are realizing just how risky these bonds are. Bond Investors Are Skittish Over Emerging Markets

For reference:
Russia Can’t Escape Historical Retrospection in Crisis

Rabobank.20130916-Russian-crisis.pdf

FRB.200211-1998-Russian-Crisis.pdf

NYT.20141216-russian-bonds.pdf