Friday, October 10, 2008

Iceland seeks Russian comfort



Iceland seeks Russian comfort

Remember the crisis of 1998 when the ruble went from being 6 rubles to a dollar, to 10 rubles, and on and on until it quickly reached previously unimagined levels? Well, now this nasty experience has been played out for somebody else. Swept by the global financial crisis, little Iceland discovered its own currency - the krona - had devalued 30 percent against the euro in just 24 hours on Monday. In an effort to save its banking sector, the country nationalized its third-largest bank, Glitnir, last week, its second-largest bank, Landsbanki, this week - and loaned its largest bank, Kaupthing, 500 million euros (13 billion rubles).

The measures have not been enough and Iceland has been addressing its European neighbors with requests for some cash (about 4 billion euros) that could "help Iceland a lot" to quote Jon Thorisson, CEO of VBS, an Icelandic investment bank. Russia received a similar official request late on Tuesday and the country's Finance Minister Alexei Kudrin was quoted by Interfax as saying: "We will consider it. Iceland has a reputation for strict budget discipline and has a high credit rating. We're looking favorably at the request." Negotiations on the loan are supposed to start on October 14.

To quote the classic "Casablanca": "This is the beginning of a beautiful friendship." Iceland's Tho­risson told The Moscow Times daily: "This is looking like the beginning of relations between Russia and Ice­land." The AP quoted the country's Prime Minister Geir Haarde as saying that in times of crisis "one has to look for new friends". As relations with the rest of the "democratic" world have turned icy after the South Ossetia operations, Russia is looking for friends in new places. Some might argue though that the newly-emerging relationship with Iceland is just a revival of old traditions. As Vladimir Krendel from the Moscow-based Institute for Financial Research put it: "We had a long-standing relationship with Iceland in the times of the Soviet Union, when we provided them with oil. This was very unusual because Iceland was part of NATO, and NATO was the enemy."

It might seem strange to some that Russia is willing to give away 4 million euros ($5.4 billion) in loans at a time when its own financial system needs a bailout. I don't see anything strange at all. Even after spending $25.6 billion (670 billion rubles) in support of the Russian ruble that lost considerable value after the country's foray into Georgia, The Russian Central Bank still has gold and currency reserves of $556 billion (14.5 trillion rubles), not to mention the Stabilization Fund of at least $175 billion (4.6 trillion rubles). Iceland's need for $5.4 billion (141 billion rubles) is almost nothing compared to the $190 billion initiative proposed by Russia's chief financial institution to help the domestic banks try to weather the economic storm. Not to mention the fact that Russia has given away much more money in forfeited loans to numerous third-world countries, while this one actually stands all chances of being repaid.

Providing Iceland with a much needed loan that would hardly dent Russia's huge currency reserves is purely political, there is nothing economic in it. And although Russia is now looking for friends in strange new places, it is clear that should Moscow approve the loan to Reykjavik, it would not be doing so in the hope of becoming great friends. Moscow needs political heavyweights as friends, not an island state with a population of 310,000. But Iceland is a perfect instrument to demonstrate Russia's goodwill to the rest of the developed world at very little cost. Yes, 4 billion euros seem a lot to us, mere mortals, but in this particular situation this sum is a) capable of seriously helping a whole country and b) is not a serious burden on Russia's reserves. For a sum of 4 billion euros Moscow has an opportunity to show Europe that it's willing to "play ball". At a time when President Medvedev is employing divide-and-conquer tactics between the EU and US, showing that Russia is willing to part with its hard-earned money to help a little European country is like dangling a carrot on the stick. Clearly, nobody will hide under Moscow's wing just because of that, but the Russian authorities seem to know that words don't mean anything, actions do. Giving Iceland a loan is very pragmatic, and pragmatism is better than embarrassing rhetoric.

By Marina Pustilnik

2 comments:

Anonymous said...

Hi - surely Russias renewed interest in Iceland is part of a long term strategy. If Russia bails Iceland, and Iceland leans towards Moscow, then eventually the Kremlin gets airbases it needs?
www.skynews.com/foreignmatters

Daniel Costello said...

My immediate reaction to the Russian bailout was that they may have provided the financing for all of the Icelandic takeovers of major European acquisitions in the last couple of decades. Perhaps just making official what has been to this point an unofficial source of Icelandic banking credit financing?