From Russia: Have People Committed Currency Suicide?
Something has come to my attention about the financial crises in Russia and while I was drinking my morning cup of coffee. There is another issue that is hitting people who have taken out loans for mortgages in Russia.
I call it “Currency Suicide”:
In Russia as in many countries it seems to be common procedure to take out a credit in another currency other than the home currency. This is an issue that I never had to face having been raised in the USA. I have never until coming to Russia to live long term ever thought about anything but dollars.
After talking to my wife, I have come to the understanding that Russians look at taking a loan out in another countries currency as normal practice. The example I will use, is in the video that you see at the top of the article. In this video a woman has a credit for her flat financed in Yens. Now when she got the financing the Yen was weaker against the Ruble. Now the Ruble has weakened against the Yen.
Guess what? She can not make the payment any more because of currency exchange rates!
Why do they do this? The answer to that is multifaceted and has more underlaying reasons than I can put into one simple post, but the main reasons are.
1. Banks steer (turn) customers to a loan package that makes the bank the highest percent yield.
2. Customers see a few dollar savings on their total loan at time of taking out loan.
3. Knowledge of financial systems is lacking, so people do not know what they are doing.
4. A form of currency speculation. **
5. Culturally accepted practice of not keeping all your eggs in one basket.
6. Last but not least: Greed!
As one bank that has a very strong policy against these type of loans, Sberbank Senior Vice President, Denis Bugrov, says that wasn’t a very intelligent move by people.
Many Russians took out mortgages in foreign currencies – lured by exceptionally lower interest rates than on Ruble loans.
Denis Bugrov says, “This shows the level of financial education in our country. Having income in Rubles, people considered its right to have liabilities in other currencies. This was profitable when the Ruble was strong, now it’s the other way round.”
Sberbank says only 6% of their mortgage portfolio was in foreign currencies. Many other banks strongly promoted those loans and have as high as 80 – 90% in their portfolio, making huge profits by borrowing cheap and lending high. While knowing that their customers would suffer from currency fluctuations and speculations.
I remember ARM (Adjustable Rate Mortgages)*** loans in America. I learned my lesson about what I call “loans of stupidity.” (interest only mortgage, the negative amortization mortgage, and the balloon payment mortgage.)
I watch the video and thought about it this way: She would not be upset if she had her loan in Rubles because now compared to other currencies she would have a bargain on her loan payment. So there would be no story.
So now another huge issue of the financial crises has swung into view. People have set them selves up for “Currency Suicide”.
** Currency speculators, who buy and sell currencies to profit from fluctuations in the value of those currencies. Speculators have posted record earnings from such buying and selling since the crisis began last summer.
*** An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices.
Kyle & Svet
comments always welcome.
Ukraine is facing the exact same problem. The funny thing is that people in Ukraine simply stopped paying their loans, so the real losers now are the banks. With the banks not seeing any return on their investments, and the run on the banks for all savings accounts, banks all over the country are on the verge of bankruptcy.
This situation has caused 2 other detramental effects. First, because loans are in a foriegn currency, this is pushing the local currency lower and lower because people are forced to exchange whatever money they have for the foriegn currency. The more they exchange, the more difficult for other locals to pay their loans because of less foreign currency in the market. This drives the banks deeper into debt because less and less people can afford their loans.
Secondly, with the banks going under, the country is slowly collapsing. As everyone knows, when banks can't loan money, businesses suffer. This situation is simply spinning out of control.
Of course, there is a third problem, hyperinflation … this hasn't occured yet, but its just around the corner if nothing is done. In Ukraine, I highly doubt anything will be done. While the people are the real loosers in this, banks are feeling the pinch just as much. Ukrainian banks aren't even foreclosing on property because they can't sell it for the price it was bought, so they are hoping that some people will pay at least something back to the banks to keep them afloat. If they foreclose on all properties, banks will go bankrupt and properties will tank even more (they are already at around 50% of what they were just 6 months ago).
Oh, and did I mention that there are no bankruptcy laws in this country? Lets assume you buy a house for $100k, taking a loan for the full amount. If the bank forecloses on your house, and sells it for $50k, you will owe the bank $50k for the rest of your life. I have friends that owe millions … MILLIONS!!!! How banks gave them loans blows my mind, but thats another story altogether.
Although this is a horrible situation to be in, I suspect that for once, the pensioners are the ones that are smiling here! They have rarely trusted banks, and certainly have not put their trust in anything other than wooden rubles!
The people who will be hardest hit, are those same people who got sucked into the pyramids in the 90's (MMM was offering 1500% interest per month at one stage), and Kyle's right, greed is at the basis of it all!
Russian government isn't immune to greed either: It was either '93 or '94, can't remember when it became illegal to have hard currency dollar accounts. They were all forcibly exchanged (at the government rate) into ruble accounts UNLESS you were a foreigner, when you were permitted to draw upto $750 per account, convert a further $750 and lost the balance!
You Know. I had 4 properties that I sold once, twice, thrice and the fourth time was a charm.
I made a lot of money selling on balloon payment loans to people who could not get a loan any other way.
They had to put 30% down, owner financing with a balloon payment due in two years from signing. All they had to do was make interest payments for two years and get fixed rate financing in the mean time. Took 4 times on all but one property to sell them and not get them back.
I made so much money.
I bet I could sell ocean front property in Reno, Nevada to the Soviets when I was younger.
Those were the good ol days.
WB
A person who trades currencies with the sole purpose of making a profit.
Farts
Hey Zhann,
That was a lot of information. Thanks it helps to have someone living around that area.
I really enjoy Ukraine because the people are fantastic. I never had any problems and if you need help they always would help. I even have been more impressed with the Ukraine police than in Russia.
The Government though is a different story and I keep hoping that the people will kick some butt in that country.
I like that the communist party is getting donations to send the President to America…
Thanks and that was a good comment.
Kyle
Hey Matt,
Svetlana talks about the terrible MLM issues that were going on in the 90's. It was a crime what happened.
Talk about taking advantage of people who never saw it coming.
I do not trust banks also and have never trusted them.
Thanks for stopping by.
Kyle & Svet