Russia in the Red

Seeking Alpha reports:

Purveyors of booming “BRIC economy” hoopla should take the “R” out of their favorite acronym. Russia is struggling no less than the developed economies, and the implications could affect your own investments.  Interfax reported Monday that in a meeting with President Medvedev, Finance Minister Kudrin claimed that the Reserve Fund of the Russian Federation—one of the two components of the Stabilization Fund set up in 2004 to serve as a rainy-day repository for oil superprofits—will be fully liquidated in 2010 in order to support government deficit spending.

The fund’s prognosis seems to be growing bleaker by the hour. In an interview earlier in the day with the news channel Vesti, Kudrin had said that total liquidation would only occur in the event that oil falls below $70 dollars per barrel for any substantial length of time, thereby depressing tax revenues and forcing Moscow to dip further into its reserves.

In that interview, the minister had also stated that Russia would start rebuilding the Reserve Fund no earlier than 2013.

The fund is currently invested in dollar-, euro-, and sterling-denominated sovereign debt. According to the Finance Ministry’s website, the fund’s value has dipped from $142.6 billion in September 2008 to $75 billion at present—a decline of over 47 percent, attributable largely to asset liquidation to cover Russian deficit spending of roughly 6.3 percent of GDP in 2009.

Of note, the Reserve Fund’s value stopped falling in October 2009 as a result of slightly higher prices for Russian crude. However, Kudrin’s bleak assessments could imply that his ministry expects lower oil prices in 2010. What do authorities in the world’s number one oil-producing country know that Seeking Alpha readers don’t?

If the fund were indeed to be liquidated next year, and the $93 billion pension component of the Stabilization Fund not raided in its place, Russia would then have to finance its deficit spending through debt, like most other counties. Get ready for Russian sovereign debt grabbing a higher profile on the international fixed-income mutual fund scene.

(Of course, Russia’s national debt of around 10 percent of GDP is nowhere near the level of the advanced economies, most of which are in the 60-100 percent range).

For those interested in where Russian deficit spending is going, much of it has been used to cushion the effect of what one former senior Putin advisor has called the most precipitous decline in Russian industrial output since the Axis invasion of 1941.
Furloughed Russian workers have been paid by regional authorities to re-paint and polish-up their inactive factories for limited periods of time. Government orders have been placed for unneeded equipment, just to keep people working. Make-work retraining and adult internship programs have been instituted. And last but not least, the automotive sector has been bailed out.

If nothing else, Moscow has shown that Washington does not have a monopoly on bailouts and stimulus spending. More to the point for U.S. investors and citizens: If the Russian sovereign wealth fund, along with China and all the rest, is now a net seller of U.S. long bonds, who is going to keep Washington’s multi-trillion dollar party going through 2010 and beyond?

7 responses to “Russia in the Red

  1. When the money is gone, who you gonna call?

    http://www.javno.com/en-world/moscow-police-braced-for-crisis-social-panic_198011

    (“though some relatives of the dead said the authorities failed to take control of the situation” – way to misunderstand)

  2. this is scary

    • Haha, Polish fascists. Scary? More like pathetic. And nothing to do with the subject.

      Anyway, a hilarious spoof on the TV spot of the Serbian Radical Party (aka Chetnik party):

  3. The Marxist, first Commie nominated State Senator and now sitting President should simply go sit in the sauna with Putin for a short time. I’m sure they can work a deal where oil stays above $70 and the new “Green” Government Motors sales vehicles to Russia.

  4. Russia was the only BRIC country to see negative growth in 2009 -6% from + 8% in the previous year, a disaster for an emerging economy. Poland for example never even went into recession. Russia’s weak fundamentals have been fully exposed. Putin spoke for years about a resurgent economically strong Russia, his lies have been fully exposed for all to see, and even his sheep are becoming a little restless.

    Russia is dependent on oil, 56% of revenue, and gas 16% of revenue, when the price goes down to under $70 per barrel Russia goes into deficit. Many in Russia were rubbing their hands together at the prospect of a catastrophic global recession, they were praying for the collapse of the US/British Anglo Saxon commercial system. These “thickos” thought ; in the words of American traitor Peter Lavelle of rancid Russia Today, that Russia would be a “bystander” ready to help create a new world order, with his Russian pay masters at the epicentre.

    Russia’s deluded dreams have been shattered the USA has a fudermentaly strong, technological advanced, extremely diverse economy, and just needs to get its balance of trade with china corrected, What people must remember is that china is now the worlds production capital, But most of their manufactures are foreign owned the US government and others can bring this manufactutyring capacity back home if need be by offering tax breaks so ultimately the Chinese will have to play ball.

    Russia who produce nothing worth buying except military hardware do not have any foreign based manufactures there economy is weak and inflexible, corruption and bureaucracy will kill off Medvedev’s dream of diversification and Russia will remain what it is and always has been a third world country.

  5. Useful info. Lucky me I discovered your website by chance, and I am stunned why this accident did not happened earlier! I bookmarked it.

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