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Busch: From Russia With...

The first thing I see when I read my newsfeeds today is an article on the problems in the Baltics. Lithuania had the worst of the worst GDP's for Q2 at -22%. Latvia and the IMF just reached an accord to unlock around $285 million for a loan. Latvia's GDP is expected to decline 18% this year. As most know, the Baltic countries were part of the former USSR that have aligned closely with the West.

Maybe the West will ask Russia to take them back?

At the conference , I had the chance to speak lunch and speak with Sergey Darkin, Primorsky Territory Governor (along with the mayor of Vladivostok). Vladivostok is preparing for the 2012 APEC conference that will have Russian President Medvedev and US President Obama attend. They have 45 different construction projects planned from building a large bridge to a light rail project to a large conference center. There is also an LNG terminal and an oil refinery being planned as well. The key is whether oil prices stay up to get the funding from Moscow. With Russia's declining population a major issue, they will also need skilled workers to complete these tasks.

The Russian Far East is blessed with tremendous natural resources that their neighbors China and Japan need. The future will be fascinating to watch as this region should become more closely tied into and partner with the countries to which they sell their oil, natural gas, and lumber. Until hydrocarbons are replaced, Vladivostok and Russia will continue to fund themselves via the world's appetite for energy.

However, they have some serious banking problems to address. Here's a snippet from my upcoming article on China, India, and Russia for www.sfomag.com : "Unlike the Chinese and more like the West, Russian banks have been under scrutiny for having bad loans and not making new loans. Fitch Ratings reported that their research shows a tenth of all bank loans have already gone bad and the final total before the crisis is over could reach 40 percent under it’s pessimistic scenario. Fitch’s Russian analyst, James Watson, said the loss ratios were significantly worse than anything so far in Western countries, though not as bad as in Kazakhstan, Ukraine, and Latvia."

Today, the Russian Association of Regional Banks said that Russia should devalue the ruble by up to 30 percent to free up funds needed for cheaper loans to the industry. "It would be foolish and inefficient to spend reserves to support the rubles' exchange rate under current conditions,"said association president Anatoly Aksakov. Clearly, the past currency regime of keeping the ruble weak to support exports is being challenged by the banks.

This is the essence of Russia: contrasting and competing interests keep things lively and uncertain.

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Andrew Busch
Andrew Busch

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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter athttp://twitter.com/abusch .