Russia's Latest Political Tumult Fails to Rattle German Banks

Investors in German bank stocks are viewing Yeltsin's latest maneuver more as high humor than high risk.
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In the past, Russia's political merry-go-round has riled international equity markets. Shares of German banks, which have a disproportionately high exposure to Russian debt, have been particularly vulnerable to the

Kremlin's

political whimsy.

Not so on Monday. German banks, as well as the broader benchmark

DAX

index, rose as investors viewed the scenario in Moscow more as high humor than high risk. And why shouldn't they? Former state spy

Vladimir Putin

, the fifth prime minister in 18 months and tapped by

Boris Yeltsin

as the next president, is seen by many as more reminiscent of

Spinal Tap's

chronically exploding drummers than a serious politician of international stature.

To be sure, banks slipped on Tuesday, but traders attributed the fall to an overall market malaise and not shenanigans in the former superpower.

Deutsche Bank

(DTBKY)

,

Commerzbank

(CRZBY)

and

Dresdner Bank

(DRSDY)

, among Germany's largest listed banks, all gave up a little ground.

To be fair, the insouciance may well be explained by earlier events. German financial stocks did their time in the gulag a year ago, when Moscow called for a moratorium on its debt payments. Compared with the selloff that fiasco caused, many investors likely feel the impact from any political theater in the run-up to next year's presidential election will be limited.

That's not to say the next 12 months are guaranteed smooth sailing for the German creditors and their shareholders. Earlier this month, the

London Club

of commercial creditors failed to reach an agreement with Russia on the rescheduling of some $30 billion in Soviet-era debt. And while the Russian government has committed itself to finding a solution by Christmas, the lion's share will continue to sit with German financial institutions in the meantime.

According to figures from the

Bank for International Settlements

, German banks still account for roughly half of the total claims on Russia. The country's total foreign debt obligations -- including to sovereign lenders -- amount to an estimated $150 billion, around two-thirds of which date back to Soviet times.

Furthermore, more political instability between now and the parliamentary elections scheduled for Dec. 19 could jeopardize the next loan tranche from the

International Monetary Fund

. IMF officials are to travel to Moscow later this month to make sure the government is complying with the conditions set for a $4.5 billion loan agreed to in July.

Not that the IMF has much choice. Without continued funding, the Russians would likely default on money owed to the fund itself. And that certainly wouldn't increase the likelihood that commercial lenders, German and otherwise, will ever see their money. If the IMF begins to look reluctant to lend this fall, bank stocks could take another hit.

"We're going to have ongoing political maneuvering for at least the next six months," says Jerry Evans, a European equities strategist for

Enskilda Securities

in London. "Most everybody realizes this and therefore people will be a bit more cautious -- Germany and more sensitive areas perhaps even more so."

For a more complete sense of closure, German financial stocks will probably have to wait until after Russians vote for a new president next summer, Evans says.

Whether Yeltsin will get his wish and Putin will follow after him as president is anybody's guess. At the end of the day, perhaps Putin will be happy enough not to become another green gooey gob like all of Yeltsin's drummers before him.