Out Of Pocket.(International Edition; GLOBAL ECONOMY)(Russian economy)

Byline: Owen Matthews

Russian capitalism is built not on oil money, but foreign bank debt.

Despite Russia's plunging stock markets, Prime Minister Vladimir Putin, like other authoritarian capitalists in China and Venezuela, has at least been comforted by the thought that the financial crisis is a repudiation of the West's brand of free-market capitalism, and a golden opportunity for his country to shine. "Faith in the United States as the leader of the free world and the market economy and trust in Wall Street has been undermined forever," gloated Putin recently. Now, he predicted, Russia, China and India would be the "locomotives of world economic growth."

Reality, though, is turning out a little differently. True, Putin did prudently stash the bulk of Russia's oil-fueled budget surplus into a $150 billion rainy-day fund, and the Central Bank's foreign-currency reserves still stand at $485 billion. But that may not be enough to weather the fiscal storm Russia now faces. Russia's corporations owe a total of $857 billion, and its banks $637 billion--with more than half that debt dollar- and euro-denominated. At the same time, an estimated $70 billion has left the country over the past month, and the stock market has crashed by more than 70 percent since May (the ruble is down 20 percent against the dollar in the same period). The Kremlin has to juggle bailing out Russian corporations and banks as their debts come due--while simultaneously hemorrhaging upwards of $15 billion a week defending the ruble.

Falling prices have obviously hurt Russia's petrol-driven economy--but oil is still at $60 a barrel, the same as in 2006 when Russia was booming. The real problem is that the crisis has exposed a critical vulnerability--massive corporate debts to famous banking icons of Western capitalism like Deutsche Bank and HSBC. According to a study by UralSib Bank, Russia's corporate debt to Western banks is running at around $187 billion, plus $116 billion in corporate Eurobonds, while Russian banks owe $193 billion abroad. Why did petro-rich Russia borrow so much? Because its own banking system was expensive and clunky, with state-controlled banks unwilling to lend and private banks often unreliable. Not surprisingly, swathes of Russian companies sought cheap financing abroad. Put bluntly, Russia's proudly independent brand of state capitalism was built not by oil money, but on western banks' loans.

With the global financial system paralyzed and Russia's sovereign credit rated "negative," whole sectors of Russia's economy are now unable to find lenders willing to finance their debts. At the same time a consumer downturn has crippled their cash flow. Particularly hard hit are real-estate ...