Tuesday, December 2, 2008

Simple Russian Arithmetic

Four bits of news offer an interesting picture:

1) From Brad Setser's blog about Russia's financial state in June:

"[...] at the end of June 2008, Russia’s government has about $600 billion in foreign assets and less than $50 billion in foreign debts. Russian banks and firms by contrast had about $450 billion in foreign debts."

2) Bloomberg sees more throwing good money after bad and at double speed:

Dec. 2 (Bloomberg) -- Russia’s central bank probably doubled spending of foreign reserves to defend the ruble from its biggest weekly plunge against the euro in more than four years, according to the median of 10 analyst estimates.

Bank Rossii may have sold $5.75 billion of foreign currency last week, based on the average of predictions ranging between $2 billion and $6.5 billion. That’s likely to contribute to a decline of about $6.25 billion in Russia’s overall cash pool, compared with $3.6 billion in the previous week, the survey by Bloomberg shows.

Russia lifted interest rates twice last month and drained $148 billion from the world’s third-largest reserves since August to stem a 16 percent currency slide against the dollar. BNP Paribas SA estimates that investors withdrew $190 billion since August as oil prices below the $70-a-barrel average needed to balance the 2009 budget triggered Russia’s worst financial crisis since the government’s default a decade ago.

3) Russian banking and manufacturing (oligarch) sector bailout machine is in place:

The FINANCIAL -- According to RIA Novosti, Russia's national development bank Vnesheconombank (VEB) has made a decision to refinance foreign liabilities of commercial banks, Central Bank First Deputy Chairman Alexei Ulyukayev said on November 30.
In particular, the Central Bank has granted $50 billion to VEB to extend subordinated loans to domestic businesses to help them refinance their foreign liabilities.

In October, VEB granted around $10 billion to refinance the foreign debts of energy companies, metals producers, and construction, transport and communications firms.

4) Capital controls are tightened:

MOSCOW, Dec 2 (Reuters) - Russia set the daily limit for currency swap operations with the central bank at 10 billion roubles ($357.9 million) on Tuesday, the same as in the previous trading session.

Limits on how much foreign currency banks can swap for roubles in the central bank were introduced from Oct. 20 in a bid to hinder currency speculators. Operations which do not involve the central bank are unaffected. ($1=27.94 Rouble)
If Bloomberg's assertion about Russia's central bank doubling the spending of foreign reserves in support of the ruble is true and oil doesn't climb up very soon to above $80/bbl (which doesn't look very probable), a simple and crude math would tell that Russia:
a) has already passed the point of no return;
b) has only about about 3-6 months until a 1998 style collapse.

Actually this time it may be far worse than the 1998 collapse, but that's a subject for another blog entry.


Global Chessboard said...

Please remember it's a global chessboard. China's reserves of $ 2.x trillion can be loaned out to Russia. the russian agreement and co-operation with the Kazakh pipeline into China is a sign.

qadi said...


China needs its reserves to keep the Yuan from crashing. Their trade surplus is ready to go to 0.

CLN said...

@ Global Chessboard:

I believe the idea of China loaning heavily Russia from those $2 trillion is not realistic for a few reasons:
a)- the current corrupt siloviki system is a financial blackhole. Without the revenues resulted from high oil prices the system is doomed. The Chinese giving substantial loans to Russia would be equivalent to throwing good money after bad. It would just delay the inevitable and the Chinese know it.

b)-the strategic cooperation between China and Russia was dictated by China's focus on securing a reliable source of energy and raw materials. With the commodities bubble gone such an alliance is not needed, and the main focus for China is to secure markets for its exports.

c)-very soon the Chinese will need every dollar of those resources because for the survival of the regime they will need to:
-produce their own internal infrastructure bailout (the first moves have already started with the $580bil or so package)
-deal with internal deleveraging of their banking system due to the collapse of industrial and real estate investment bubbles, and I believe we will see a huge problem with the balance sheets of their domestic banks
-according to the latest entry in Michael Pettis' blog China has decided to keep its exports "competitive". That means, in translation, the Chinese government, instead of using their reserves for covering the imports required for internal development (that would create an internal consumption market), have decided to subsidize raw material imports indirectly by subsidizing exports. They do this only to avoid massive layoffs and preserve internal stability, but such a tactic would result in a very high rate of burning through those $2 trillion in reserves (out of which only a fraction would be available for export subsidies). This kind of flawed strategy is pursued now by South Korea:

With this policy, China really doesn't have the resources to extend any significant loans to Russia.

Here is the link to that entry in "China Financial Markets" blog: