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Russia is sinking into a swamp of bad loans.

The scale of credit rot in the Russian banking system exposed by Fitch Ratings this week is truly staggering. The report is yet another cold douche to those betting that the BRICs (Brazil, Russia, India, and China) can pull us out of our mess.

Lenders will need to raise $60bn (£37bn) in fresh capital if the “pessimistic scenario†unfolds. Bad loans could reach 40pc, although analysts are flying blind since bank disclosure “does not always capture all asset quality problems.†Uhhm.

The report follows an equally disturbing (if very different) note on the banks in China, where a “margin squeeze†has set off a explosion of unstable loan growth. Some might see as this as `good’, ie stimulatory, but since the liquidity is sloshing around a crushed economy that still lives off deflated US and EU export markets, it is largely leaking into asset speculation.

This is much like the US from mid-1928 to late-1929, a strange 15 months, often forgotten. By then the world economy had tipped over. Trade was contracting. Commodity prices were deflating. Yet leveraged funds flooded Wall Street, decoupled from the underlying reality. We all know what happened. The markets buckled for no obvious reason in September 1929, then cratered in October.

As for India, excuse me but with a combined budget deficit of 13pc of GDP (including fuel subsidies, which are kept off books) and “real†interest rates of minus 5.5pc, Delhi already has its foot to the floor. India is heading towards a debt compound trap as fast Britain — and there is a shocker.

No doubt India and China will thrive in the end, but it is wishful thinking to expect the BRICS to pull the whole global economy out of the debt-leverage dump.

But I digress. Fitch is coy about the exact meaning of a “pessimistic scenario†for Russia, but it is closely tied up with price of oil and metals. Commodities make up 80pc of Russia’s exports. Crude has of course jumped back up from the February low of $30s to around $70 a barrel, but is still half its mad peak of $147 last year.

Whether it will stay there is a disputed matter. The level of “cheating†by OPEC members is creeping up again. The International Energy Agency has slashed its outlook for the next five years, saying demand in 2013 will be 3.3m barrels a day less than previously expected: a) global growth is not going to roar back, given the massive headwinds, b ) a lot more has been done to raise fuel efficiency than often realized.

Vladimir Putin has not yet fully understood the mess that he is in (he is not alone in that). This week he ordered banks to step up lending, ie to dig themselves deeper into a hole.

“I am asking the heads of financial institutions to control this situation and not to plan any summer holidays until the moment that this has been dealt with as it should,†he said.

Even by the Kremlin’s own count, Russia’s economy will contract by 8.5pc this year. Capital Economics says more like 10pc, with unemployment rising to 13pc by the end of next year. This is worse that the economic crunch following Russia’s default in 1998.

How far we are from the giddy heights of last summer, when Russia could imagine for a moment that it was a superpower once again, and Georgia felt the lash.

It is a fair bet that Russia will weather the crisis. Some $57bn in foreign debt must be rolled over this year but that is manageable. The Kremlin still has deep pockets. ($400bn in reserves, the world’s third largest). It can and certainly will step in to prevent a systemic crisis. The biggest four banks have already received $24bn in fresh capital. There will be no state default.

But if you want to plunge into Russian equities on the ground that they are still cheap, follow the advice of Kingsmill Bond, chief strategist at the Moscow investment bank Troika Dialog.

Avoid cash guzzlers such as Transneft and Gazprom with an attitude problem, ie contempt for investors. The government has a strategic stake in 68pc of listed stocks.

Stick to those with both free cash flow and eagerness to offer a decent dividend such as Sberbank, Peter Hambro Mining, Raspadskaya Coal, Baltika, TNK-BP, MTS, Uralkali, and NOVATEK.

Do your research. “Investors are starting to call into question the fanciful nature of calculations that underpin certain company valuations,†he said

Note a final warning from Mr Bond. The Moscow bourse tipped over a month or so before the oil price peaked in July last year. Equities were the early warning signal.

It has tipped over again, falling over 20pc since the start of June. We have been warned.

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