At what price are the mineral, oil & gas reserves of Russia & Brazil valued, particularly in their debt facilities with western bankers?

If it was fair value as of Q2 2008, there is an immense amount of debt outstanding that relies on $150 oil and its equivalent for ore, copper, nickel and their cousins, as collateral and basis for payback.

The way you can go bankrupt having $10 billion dollars in net assets is to lever $40 billion more against it. Things accelerate when your collateral is mineral or fossil fuel reserves and they get halved in value over a 60 day period.

The attraction and security to lend into emerging markets (e.g. Russia, Brazil) was the vast and plentiful reserves of natural resources that could be mined or extracted and sold into a globe that was reported by short seller and press corps everywhere to be impossibly and everlastingly short of supply.

Compounding the squeeze for many emerging markets is a practice seen in Iceland’s dire straits. The business or individual borrows under domestically issued lending instruments from foreign institutions, denominated in foreign currency (i.e. dollar or euro). The lender stipulates it as a term of the debt agreement. The contract requires you convert your real, ruble or krona to dollars or the euro, when paid out.

As credit excess falls from its own weight, global demand is retreating substantially. Emerging market currencies devalue and borrowers struggle to pay back debt facilities denominated in foreign currencies.

As a business, you’re getting half price for sales of your commodity – from the perspective of the value you used to borrow against. You also have to pay back 110% or 120% more than the debt’s face value and interest costs. They’re contracted in foreign currency (dollar, euro) and your domestic currency is devaluing against it. This can drain a nation of cash quickly.

The emerging market set up was fragile, as their boom time economies were only a few years old. Even during the best of economic times, their currencies were still not trusted and did not merit debt contracts being denominated in them.