The Biggest Insider Trade in History
- By Yulia Latynina
- Oct. 29 2008 00:00
But I have never once heard U.S. authorities try to pin the subprime mortgage crisis on the KGB. There was a real estate bubble and it burst.
The most amazing thing about Russia's financial crisis is what the government calls it. We are told that the economy was going gangbusters until those underhanded Americans withdrew all of their speculative investments and our market collapsed through no fault of its own.
A banker recently complained to me: "After the stock market crash, Severstal is now worth no more than its bank account balance. Is that a fair price?"
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Question: How much should a Russian company be worth in a country where the prime minister threatens to "send a doctor" to clean out Mechel or send tanks to clean out Georgia?
The market economy is remarkable, but not because it prevents people from making mistakes. People do make mistakes -- and very big ones.
What will happen next? The collective debt of all Russian banks and companies exceeds $510 billion, which is roughly equal to the combined total of the country's stabilization fund and foreign currency reserves. It would be impossible to refinance such a debt in the midst of a Russian financial meltdown. Only the state can partially refinance it using its reserves and stabilization fund.
That means that the government's reserves and stabilization fund have replaced the prosecutor general and the Federal Security Service as the state's most effective tool for seizing coveted companies. As a result, experts adept at orchestrating takeovers of debt-burdened companies through government bailout and buyout schemes have become more important than those who rely on trumped-up criminal charges to accomplish the same goal.
Put another way, Finance Minister Alexei Kudrin has become more strategically important to the country's leaders than Kremlin Deputy Prime Minister Igor Sechin. Maybe that is why imprisoned Deputy Finance Minister Sergei Storchak, whom Kudrin has always supported, was unexpectedly released on Oct. 21 pending his trial on fraud charges.
Company takeovers orchestrated through government bailouts and buyouts have a clear advantage over the arbitrary strong-armed tactics of the prosecutor general. The latter tends to evoke cries of authoritarianism and abuse of government powers, including lawsuits brought against Russia in the European Court of Human Rights in Strasbourg. But when it is done with debt bailouts and stock purchases, the sinking company shows real humility and even says "thank you."
Seizing a company with the help of the Prosecutor General's Office and special forces in masks is a hostile takeover. When the foreign currency reserves and stabilization fund are used to effectively nationalize companies, the government somehow becomes a white knight.
Thus, as it turns out, Putin's "house call" to Mechel and the five-day war in Georgia was the biggest insider-trading deal ever carried out in history. This is how it was done: First, the authorities built huge reserves from the taxes levied on the country's oil companies. Second, they wrecked their own country's stock market by destabilizing the economic and political environment. Finally, they used the reserves and stabilization fund to buy stock on the cheap in heavily devalued companies.
Most likely, it was all just a fortuitous accident, but then again maybe the government played its cards brilliantly, coming out big winners in this amazing financial scheme.
Yulia Latynina hosts a political talk show on Ekho Moskvy radio.