Russia as the new Malaysia?

To me, what made Malaysia noteworthy during the Asian financial crisis of the late 1990s was how vigorously the country defended the interests of a small cadre of insiders who had amassed mega-fortunes over the prior decade or more.  Political connections + aggressive use of financial leverage–after all, what local bank would deny them a loan?–were the keys to  their success. In the end, Kuala Lumpur imposed capital controls lasting about a year to prevent foreigners from selling assets and withdrawing the funds from the country.  That action gave Malaysian financial markets a long-lasting black eye, something that could have been avoided if Malaysia had chosen to raise interest rates to achieve the same end instead.  But doing so would have bought down more than one of the local moguls.

In current crisis among oil-producing countries, Russia is already taking the first step down the Malaysian path.  Last week Moscow orchestrated a $11+ billion sale of bonds by oil giant Rosneft.  The issue had a coupon below that of government debt.  It was reportedly taken up mostly  (entirely?) by state-owned banks.  The central bank promptly declared itself willing to accept the bonds as collateral for loans to be made at rates below the bond coupons.  Indirectly, then, the funds Rosneft raised come from the Russian equivalent of the Fed.

That President Putin should protect his cronies shouldn’t come as any surprise.  But if this is a chief aim of his government, which it appears to be,  investors have to at least consider the possibility that Moscow may be forced to impose capital controls at some point.  For you and me, this implies checking to make sure we know what exposure we may have through emerging markets or yield-hungry fixed income funds/ETFs.

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