Special Extra: Rubles and Reserves and Ruin, Oh My!

Market Watch reports that last week Russia’s foreign currency reserves fell to less than $440 billion, down nearly $20 billion for the week.  In just the past four months Russia’s reserves have fallen nearly $150 billion, about one-quarter of their total and an average of almost $40 billion per month. At that rate, Russia’s reserves will be totally exhausted before 2009 is over.

And even though the reason for the tumbling reserves is the Kremlin’s furious attempt to create artificial value for the ruble and control inflation of imported goods, upon which which the country’s anemic economy is utterly dependent, the ruble continued to slide.  On Thursday the ruble lost another 1% of its value, the fifth time this month its has experienced devaluation.  Russia cannot hold its currency in place no matter how much is spent if the price of Russian oil stays below $40 per barrel or goes even lower, as it may well do.  To do so would place Russian oil at a competitive disadvantage, and the Kremlin canno unduly inhibit its sale, since it depends on that vital revenue.   Yet, the Kremlin cannot allow the ruble to enter freefall, since its reputation in the Russian population is heavily dependent on the notion of stability.  In other words, the Kremlin is between a very big rock and a very hard place.

Lars Rasmussen, an analyst at Danske Bank, intoned an ominous warning:  “Foreign exchange reserves are now below the private sector’s gross external liabilities, and a further draining would jeopardize the creditworthiness of the Russian economy.” And that rating is already flirting with junk status, as Standard & Poors downgraded Russia’s rating just days ago.

Filled with blind panic, Russia once again began speaking of joining OPEC, seeming to forget that not being a member of OPEC was its chief entry to European society.  Is Russia really prepared to become fully Islamic, even as its population is doing?  Perhaps the Chechen rebels will have the last laugh after all!

Dark, dark clouds hang over Russia. Is this the beginning of the end for Russia as we know it?

12 responses to “Special Extra: Rubles and Reserves and Ruin, Oh My!

  1. I find myself interested why you would think that the reserves would continue to tumble as they have up to now. I mean, a real reason. The vast majority of the money wasted was either in propping up the ruble, which has largely ended, or in producing liquidity, which has been successful. The Russian financial system is very well liquidized right now, and the only thing really keeping it back is oil prices which are predicted to slowly start building up.

    Oil prices jumped eight dollars just over a pronouncement that Russia could join in the cuts – When it actually happens, the prices will go even higher, possibly to the point that for selling less oil Russia (and OPEC members) will get more.

    Personally, I think you’ve wanted it too much, you’re deluding yourself into believing it. But, of course, I’m a baboon, so what would I know?


    Largely ended? Are you insane? What source can you cite to support your drivel? The price of oil is still falling, so the ruble will keep falling, and it must be defended. What’s more, the government isn’t spending only on the ruble, but also on the stock market. You’re babbling neo-Soviet propaganda like a chimp without even trying to document your facts. Cut it out. You are embarrassing yourself.

    At least you did get the baboon part right, we must admit that.

  2. The problem seems to be the refusal of banks to loan , even after the fed liquidated their reservoir.

    So those banks have plenty of money , but are still hoarding the money and not letting it leak down to small businesses and the little regular guys.

    My guess is , the U.S lawmakers will have to force those banks to let the money go..

    Also , pass a bailout of home-owners ,small businesses and the small guys.

  3. Fred,

    The main force driving oil prices up was China. Now, this is coming apart. The Economist has an article on China entitled “Chinese trade.
    Falling apart” They write:

    “JUST how worrying are the figures, published on Wednesday December 10th, showing that China’s exports and imports plunged in November? Exports fell by 2.2% last month from a year ago; imports plummeted by an astonishing 17.9%. One analyst sums up the news as “a shock figure”.

    What does this mean? Chinese growth will slow considerably. As they write: “The rapidity of the decline is as striking as its extent. Trade growth in October was similar to preceeding months; exports grew by more than 19% from a year earlier. A sudden drop in just a month has surprised even the most pessimistic economists. Some analysts point out that a global shortage of trade finance in November may have exaggerated the decline, but the Chinese juggernaut is definitely stumbling.”

    With China producing less, they will be consuming less fuel, and this will cut back on global demands.

    What is your hope? That OPEC will cut production? Well, the problem is that OPEC will have to play catch up. Not only will OPEC have to cut deeply if they want to push prices higher, they will have to cut even more to make up for the coming decline in Chinese consumption. OPEC is not well known for meeting production cuts when prices are going down. There is simply too much temptation to cheat and to promise cuts and surreptitiously export oil.

    Why will the reserves continue to shrink? Quite simple. Russian companies still owe hundreds of billions that will have to be paid. This will mean money leaving Russia and the only money left is in the reserves. Also, the Russian government is already in deficit! According to Vedomosti, the Russian government had a $10 billion deficit for the month of November. Also, there will be the balance of payment deficit as Russia will soon be importing more than it sells, leading to more dollars and euros leaving the country. Facing all these deficits (government and trade), the reserves will be spent quickly.

    Source: http://www.economist.com/finance/displayStory.cfm?story_id=12758009&source=features_box_main


  4. Hey, how reserved are the “reserves” in Russia, Fred? It’s not like we are talking about a regime that operates under any semblance of honest transparency.

    Moscow’s real estate is dropping like a rock, that’s a huge bubble, worse than anything here. Provincial governors have bribes and payrolls to meet, how long can they be faithful to the Kremlin without insurrection in their areas?

    Russia is a third world country in economic stature without oil prices propping them up, in a severe global recession they fall the farthest faster.

  5. I don’t think Russia will formally “join” OPEC but I do think Russia will co-ordinate its oil productions levels with OPEC (which some might argue is the same thing). Russia has been sitting in on OPEC meetings for some time now, without becoming a formal member. At the next OPEC meeting (17 Dec) Russia will gauge the willingness of OPEC to cut production, and Russia will offer to cut its own production by a similar percentage in a coordinated worldwide action with OPEC.

    Russia has a private oil industry, with some major state-owned (partially or wholly) companies in that industry. So a country such as Saudi Arabia (which has a 100% state-owned and controlled oil industry) can simply issue the edict to their state companies to cut production by 1 or 2 million barrels a day, but for Russia it will be a questions of granting “export quota licenses” to these private companies. So, as an oil company, you could only export in any given quarter the amount your were authorized to export by your state license for that quarter. Once you reach the quota you can’t export any more. While such is situation might seem “undesirable” from the standpoint of the companies, everyone in the Russian oil business now realizes that there is a need for global oil production to be cut back, and Russia must do its bit too. Oil demand has fallen in response to the ongoing global financial meltdown of western capitalism, so oil supply must shrink now too (unless we want the price to go through the floor).

    A good short-term target would be to restore prices to a more fair level of say $60-80 a barrel. If Russia acts in coordination with OPEC that could easily be achieved, even with much lower global demand.

    But if Russia agrees to act in concert with OPEC to reduce production, that’s no mere “abstract philosophical concept,” but it boils down to actual production cuts, in the amount of oil that each oil company is allowed to export. This is a new thing for Russia, as the Russian state has never acted to restrict oil production before. (However most oil companies would much prefer to get $80 a barrel, for slightly reduced production–in an environment where every other company has to reduce too– than to get $40 in as as-much-as-you-can-eat (I mean produce) environment.

    The Russian state is in talks with major oil companies, which support the idea. Russia has assured the oil companies that any cutbacks in production would be fairly distributed to all companies equally (irrespective of their percentage of state ownership). Partially or wholly state owned firms will not get an unfair advantage from the production cutbacks, but export quotas would be assigned uniformly and fairly.

    So if the cutback in production that Russia agrees with OPEC is say ten percent, then each company will receive an export quota license allowing it to sell 90 percent of what it sold in the previous quarter, and so on.

  6. Roberto,

    You have a lot of “ifs” in your plan. “If” OPEC cuts back on production, “if” Russia acts in coordination with OPEC, etc. The problem is that OPEC is not particularly good at cutting back on production when prices are going down due to a global recession. You can use game theory to explain this.

    OPEC is most successful when production cuts lead to immediate price increases (think 1970s). That way, each member gets more money immediately even though they are selling less oil.

    When prices are going down, and continue to stay down even when you cut production, invariably the best strategy for OPEC members is try to get other members to cut their production and to slyly sell more oil on the side. Of course, when all the member countries do this, OPEC promises to cut production does not mean much.

    Some countries can cut production with much greater difficulty than others. Saudi Arabia can cut production without too much trouble, Iran not so. Iran has a very young and growing population and like Russia the regime used petrodollars to prop itself up. It won’t be very easy for it to cut production.

    Finally, OPEC still has to meet its last promised cuts in production. It was barely halfway there last week. The main problem was that Iran wasn’t meeting its promised cuts and Saudi Arabia did not want to cut deeper if it wasn’t matched by Iran.

    For all these reasons, I would not put too much stock in OPEC and promised cuts in production.


  7. I made mistake with last post. I meant to delineate the quote from Lars Rasmussen from my reply, but something in the HTML got away from me. Here’s a corrected version (I hope).

    I don’t like this “WordPress” because you can’t see your comments and edit them before submitting them. -Misha

    Lars Rasmussen, an analyst at Danske Bank, intoned an ominous warning: “Foreign exchange reserves are now below the private sector’s gross external liabilities, and a further draining would jeopardize the creditworthiness of the Russian economy.” And that rating is already flirting with junk status, as Standard & Poors downgraded Russia’s rating just days ago.

    The Russian state has plenty of reserves to meet its own state obligations (and then some), so now the Russia ill-wishers are speculating about private Russian obligations. But private debt is just that, private! We are speaking here about debt owed by Russian companies mostly to foreign lenders. But the Russian state does not guaranty the debts of Russian companies. (The lenders didn’t know that when they made the loans?)

    The quote above by Lars Rasmussen that, “Foreign exchange reserves are now below the private sector’s gross external liabilities” is comparing apples and oranges. The state’s foreign exchange reserves are not pledged as collateral for the private loans of Russia’s corporations. The Russian state remains free to use its financial reserves however it sees fit.

    In a worst case scenario, Russia could just let those companies go bankrupt and let the foreign creditors seize whatever assets are pledged as security for the loans. In many cases that’s probably not a bad idea. Better for poorly run and insolvent Russian companies to become a headache for their foreign creditors than for them to become the headache of the Russian state.

    Assets such as energy in the ground, mineral deposits and real estate can hardly be repatriated to a foreign country. They will stay in Russia (as part of the Russian tax base) but they will simply have to be recapitalized on someone else’s balance sheet, perhaps at a lower value. The oligarchs might not like that (and they are really the only ones who would be terribly harmed by it), but hey that’s life.

    However the Russian state has not simply been sitting on its hands. In many cases it is undesirable to see certain assets pass to foreign control, for example in “strategic” sectors such as defense, energy, media and so forth. So the state has made good some of the foreign loans, either by (1) providing funds through Russian banks to repay the loans (so the loans now become loans owned to Russian banks–and loans owed ultimately to the Russian state in these cases); or (2) by purchasing new stock issues, giving the state a share–or an increased share if the state already had one–of the company in question. Each case is handled on a case-by-case basis. The state must decide who will be allowed to fail, who will get a loan, and whose stock we will buy. At current depressed stock prices Russian stocks are a bargain for the state. A billion dollars buys a much larger percentage stake in a company when its shares are trading at $10 than it does when they are trading at $100.

    In any case, why look at “gross private liabilities?” Why not “net private liabilities?” Many of the oligarchs keep billions in offshore accounts. They have the capacity to repatriate that money (with varying degrees of transparency) and use it to make good their foreign loans. Many of them will do just that, before they will suffer the loss of their business empires either to foreigners or to the Russian state.

    To speak about the ratio between “net state reserves” and “gross private liabilities” is rather meaningless. It implies firstly that the state is bound to make good all these private loans and secondly that all the loans will become immediately “due and payable in full” in the next year or two. But only a fraction of these private liabilities will fall due before 2009 or even before 2011. For the most part Russian firms only need to pay the portion of the loans which falls due (the “minimum payment” so to speak) to their foreign lenders, in order to avoid defaulting on the loans. Is there anyone who still thinks the world economy is going to be mired in deep recession in 2011? If so it will be a depression, not a recession, and the West will have much bigger problems than Russia will.

    Russia’s prudent and wise leadership had the foresight to build up the massive reserves in the first place. Russia would be in a much bigger world of hurt right now without those reserves. (It would be in essentially the same position as a Ukraine, a Latvia or a South Africa.)

    The Russian leadership is very much aware of how much money is left in the reserves and they aren’t going to spend it recklessly or foolishly (however much you at LR might hope or pray for them to do so). The Russian state is executing a well-thought and balanced anti-crisis program which combines limited ruble support with carefully controlled injections of funds into the banking system along with limited share purchases. The intent of the state’s intervention (like similar interventions in the US and Europe) is to prevent the complete financial meltdown of the Russian economy. It’s the only prudent course of action at this point. So Russia’s reserves are down right now. And what did you expect to happen?

    Russia didn’t create this crisis. It started in the U.S. and no one disputes that. Do you? Russia has been praised for its prudence in building up hundreds of billions in reserves during the last economic boom. What was the U.S. doing during that time?

    But even if Russia didn’t create this crisis, Russia like many other countries has been adversely affected by it. Now Russia (like the others) is calling for structural reforms in the world financial system that will prevent such a crisis from happening again. Frankly the post-crisis world will be a different place from the pre-crisis world and the biggest casualty will be US economic (and perhaps political) leadership in the world. And you’re foolish if you don’t “get” that. It is not only–or even primarily–Russia that has been saying this but the entire world is now speaking with one voice. Do you listen to to what your European friends are saying? For too long the US has lived on the edge, pushing on the world a philosophy of globalism based on unfettered and unregulated capitalism, combined with just the right dose of fiscal imprudence, recklessness and just plain fraud and abuse. Now the whole world is reaping a whirlwind from this twisted American philosophy. The hold that the U.S. has on the reigns of its world-empire is slipping away in our lifetime. This is the much bigger story, and not what is the state of Russia’s reserves at the moment. Russia will survive and Russia will do just fine.

  8. This whole Standard and Poors thing (with the “downgrading” of the rating of Russian sovereign debt) is really more of a joke than anything else. Now would that happen to be the same Standard and Poors that assigned “AAA investment grade” ratings to the toxic subprime mortgage securities, almost up till the very moment the current crisis began? I thought so.

    The S&P downgrading of Russian sovereign debt would be meaningful if the Russian state actually had any debt or any reliance on foreign credit markets. (It would no doubt increase the state’s cost of borrowing by a few points.) But former President Putin made a point of using Russia’s surplus to pay off Russia’s sovereign debt before he began building up Russia’s little nest egg (the foreign currency reserves); therefore this move by S&P is essentially meaningless for Russia.

    Now Russia is not technically “debt free,” I know. Russia does still owe a few odd billions to foreign creditors. These are such things as “agricultural credits,” which were extended to Russia (or to the USSR, whose debt Russia assumed) on very favorable terms. Foreign governments made such subsidized loans to the USSR (and to other countries) more for the benefit of their own farmers and exporters than to earn interest income on the loan, and such loans carry favorable interest rates and terms. So at some level it didn’t make sense for Russia to pay off those subsidized low-interest loans (much the same way that someone who normally doesn’t carry debt is willing to carry it, if a credit card company will give him a low enough introductory interest rate). In this case Russia is earning more on its investments than the cost of interest on these loans, so it would be a poor decision (financially) to repay such loans before they fell due.

    But for all intents and purposes the Russian state is debt free, and it has been for some time. Therefore moves such as the S&P “downgrading” of Russian sovereign debt are essentially meaningless. Russia doesn’t have any such debt to downgrade.

    The S&P analysis is based on a scenario where Russia burns through all of its reserves (the 400-something odd billions still left), like a mindless fool, and then approaches the credit markets with hat in hand seeking a loan. This has about as much probability of really happening as the sky falling.

    Or to put it another way, S&P analysts know that Russia wouldn’t approach financial markets for a loan unless it first spent all its reserves. If the current world financial crisis becomes bad enough for that to happen, then things would be bad indeed. Probably just about everyone’s credit rating would be cut by that time (and U.S. credit card companies are reducing credit lines even now, even for perfectly solvent customers who have never made a late payment, largely for the same reason.)

    Part of what’s going on here also is that Russia is now playing the West’s game. The Russian economy is now more integrated with the world economy than at any time in history, and this explains why economic events in Russia are pretty much moving in tandem with economic events everywhere. (During socialism the Soviet economy did not move in tandem with the West–Russia’s economy grew enormously in the 1930’s, when the West was mired in the Great Depression.)

    So the thinking in Washington is something along the lines of “now this gives some new tools to control Russia.” According to this thinking, if the Russian’s act up (say in Georgia or elsewhere) we can now threaten them with financial and trade actions (since Russia now actually participates in the world financial and trade mechanisms, much more than it did before). But the other part of this story (and the part that the neo-cons just can’t grasp) is that the influence and control which the U.S. previously had over the world is slipping away, at breathtaking speed, even as Russia becomes more and more integrated into the new (multi-polar) global world that is rapidly displacing the old U.S. hegemonic order. It certainly doesn’t help your cause in the world when you bust your economy (and you take everyone else’s economy along with it).

  9. Michel, yes, China was a large driving factor driving up oil prices. However it certainly wasn’t the only factor, and it’s still maintaining growth rates that make the West look at in utter jealousy (I think a 7% is estimated in 2009 – the US had ~2% last year, BEFORE the depression). China’s rather stable right now, and while it’s requirements will be cut, they won’t disappear.

    Again, oil prices gained $8 with a mere pronouncement of possible production cuts. Russia sees this, sees that it needs higher oil prices, and if it can cut production costs (less oil = less production costs) it will probably join in the cuts.

  10. Fred,

    The rise of China has been acknowledged by virtually every economist as one of the reasons for the upward push in the price of commodities. By consuming more raw resources, this created shortages (or at the very least less surpluses) and this pushed the prices of all natural resources upwards.

    Although 7% may seem impressive, for Chinese authorities, this is a frightening prospect. China NEEDS high growth to provide jobs to a hundred+ million peasants that are in the cities looking for jobs and the millions more that will leave rural China to look for work. Slower growth means fewer jobs, fewer jobs means peasants in the cities who have nothing left to lose, and this is what China fears most.

    As the Economist article I cited notes, 40% of China’s GDP is founded on export abroad and the main buyers of Chinese goods are the G7 countries. Now that they are all in recession, they will be buying fewer goods from China and this will slow China’s growth, potentially leading to cracks in China’s social stability.


  11. I was in St. Petersburg Russia in September and there is a massive industrial and office park under construction in the suburban area, with gleaming new buildings going up left and right. This is called the “Chinese section,” because it is all Chinese investment. The Chinese take Russia’s offer of friendship very seriously and this is not only evident with words, but with actual tangible action and investments. I think the future will only see Russia and China continue to grow closer together and cement their burgeoning relationship. Whatever happens in the short term (in the current economic crisis) the fact still remains that China is hungry for energy and mineral resources (both of which Russia has lots and lots), and Russia is hungry for money and foreign investment (of which China has lots and lots). This is not a “philosophical” statement about what “ought to happen,” but a simple observation about what is happening right now (and I have seen it with my own eyes). Russia is rapidly integrating with the “world economy,” but this world economy is changing just as fast as Russia is integrating with it. The position of the “Old World” (USA, Europe and so forth) is rapidly diminishing. Russia offered a partner relationship with this old world, but Russia was rejected. Nevertheless, life still goes on and Russia must still press forward.

  12. Chinese indeed take Russia’s offer of friendship very seriously. If you visit South Siberia (Khabarovsk, Chita, Irkutsk) you will see that Chinese businessmen see Russia the same way US businessmen see Philippines or Indonesia: underdeveloped place to do business and make money. And they are probably right.

    But to think that Russia can offer a partner relationship (rather than energy and mineral resources) is just delusional.

    But Soviet Union has been delusional for all of its history. As the old joke goes, Russian leaders never really intended to “catch up and overcome US” – just to catch up. Why? because otherwise everybody would see their naked ass.

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