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Russia Is Looking at a Wave of Real Estate Defaults as the Ruble Plummets

As many as 150,000 Russians who hold mortgages in their country that are denominated in US dollars are now facing steep increases in payments.
Photo via Reuters

It seems Russia didn't learn much from America's real estate bust.

As many as 150,000 Russians who hold mortgages in their country that are denominated in US dollars are now facing steep increases in payments — which could bring on a wave of defaults and home foreclosures if the Russian ruble continues to fall in value alongside the plunging price of oil.

Now, 150,000 is a relatively small number of people in a country of more than 143 million. But it illustrates how the Russian economic crisis is hurting regular folks, said Zach Witlin, an associate at the Eurasian Group.

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"The Russian government is taking it quite seriously," Witlin told VICE News. "This is the sort of thing that really worries them."

Russian President Vladimir Putin's autocratic style presupposes that life is improving for the average citizen, said Witlin. But banks that are kicking people out of their homes would likely contradict Putin's vision of a happy Russia.

"Part of the whole promise that underpins the legitimacy of the regime is they [Putin and his cronies] pass on social protections," said Witlin. "They provide 'stability.' That is Putin's favorite word."

To Americans, it might sound odd to take out a mortgage in a foreign currency. But in Eastern Europe, it's common to bank in dollars, euros, and British pounds, as well as local money. Conducting business in foreign currencies is risky, however, because their values are relative to each other, and their prices rise and fall like those on any other market. And many Russians are now learning about that risk.

Radio Free Europe/Radio Liberty recently told the story of Yelena Balanovskaya, who took out a $200,000 mortgage to buy a Moscow apartment. "At the time, the 41-year-old didn't think it was much of a gamble," the news agency reported.

In March, when exchange rates favored rubles, Balanovskaya $2,200 monthly payments equaled 77,000 rubles. Since then, as the price of oil has plunged — oil is Russia's primary money-making export — the ruble has lost around half its value. Balanovskaya's payment is now nearly doubled at 142,000 rubles.

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To make ends meet, she and her husband and three children are now renting their new $200,000 apartment and living in a cramped one-bedroom. Banks won't renegotiate her loan without punishing her with interest rate hikes. Putin has said his government might help some mortgage holders, but has yet to unveil any measures.

This all sounds a little like Florida in early 2009, when people were losing their homes in droves — except Americans took out risky loans wrongly believing the value of real estate would always go up, while Russians bet on oil.

But Dan Cloud, a Princeton University philosophy professor who started a Russian investment fund, compared the country to Argentina, which has defaulted eight times in its 200-year-old history.

Russia defaulted on its debt in 1998. Today, Russian state-owned and private companies owe Western banks $600 billion. It's not clear if Russian debtors, including the government, will be able to repay those debts if the ruble keeps tanking.

"Russia is starting to look like one of those countries that borrows a lot and defaults," Cloud told VICE News.

Western banks eventually extended loans to Russia again after Moscow's default. But Cloud noted that today the United States and European governments have imposed sanctions on Russia for its aggressive policies towards Ukraine. Russians won't likely be able to go back to Western banks so easily if the state and private Russian businesses default again.

"It's as if Argentina in the middle of a currency crisis suddenly made the decision to occupy the Falklands again," said Cloud, referring to Argentina's unsuccessful invasion of the British-owned islands in 1982. "You're alienating the very people you are counting on to bail you out."

Putin Saves an Oligarch, Admits He Has a Lover and Deflects Blame for the Ruble Crisis. Read more here.

Follow John Dyer on Twitter: @JohnDyerJr