The Russian economy (catch all)

[Firn]

Firn---the Russian Foreign Ministry claimed late last week they could hold up under sanctions as they had over 500B in foreign currencies---any evidence of that?

They would say that wouldn't they?

I think it is important to grasp the basic concepts of a central bank and it's relations to the economy. In general in very rough terms the central bank is there to:

a) help keeping the economy of your country on track
b) handle the technical trade stuff to allow the goods to flow

There is a rather long list of things a country and the central bank itself can do to keep going and to lessen the fall of it's currency. However the further down you go that list and the more forceful some of those actions are the more you tend to hurt your economy.

It seems for example the Bank Rossii has shifted most of it's US gov bonds (treasuries) out of the US and might have already started to sell to get some USD in cash, which they likely need after suffering a cash outflow of $ 21+ bn. As of December the had almost $ 140 bn of them deposited at the Fed. This has per se no effect at all on the Russian economy, but without enough reserves Russia will be no longer able to pay it's many imports. They burned so far through their cash at a surprising rate. Thus the Russian Central Bank, anticipating some of trouble coming it's way has used a two-pronged strategy, selling $ reserves and increasing interest rates.

However raising those rates by the considerable amount of 150 bp does reduce demand in an already weak economy. Now they stated if I recall that the won't go up further but this of course depends on how their ruble and their asset side of the balance sheet is doing. If they have to sell too much $ too quickly they might impose capital controls and increase the rates. So instead of having a central bank doing it's thing to help the economy the economy has now increasingly to pay to keep the central bank (and thus itself) going.

So the key question is how much damange do they have to inflict on their economy to avoid a meltdown of their balance sheet?

P.S: Earlier I ridiculed the idea of some Russian nationalist who imagined that he could inflict some damage on the Western economies by eliminating the dollar as their foreign reserve. Predictably the Crimean Crisis has led to money going into the safe havens, or gov. bonds of Western countries like the US, Germany, UK and so on.

“Treasuries, bunds and gilts lead in this kind of move,” Steven Major, head of global fixed-income research at HSBC Holdings Plc, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton and Anna Edwards. “It’s very difficult to imagine a scenario whereby everyone just kind of kisses and makes up, so on Monday morning it’s not going to be a case of everything’s fine. It’s either going to be very very bad, or very bad.”

German 10-year bund yields fell as much as four basis points to 1.50 percent, the lowest since July, and U.K. 10-year gilt yields dropped as much as five basis points to 2.64 percent.

So at the same time that the Russian Central Bankers have to damage their economy and sell their reserves to slow the fall of Ruble their important Western counterparts are 'forced' to sell their bonds more dearly as so much money is wanting to buy them.

It is the old problem of Russia, if the big money wants security it isn't coming in, it's leaving. And it even does decrease the price it's rivals have to pay for their debt....

[OUTLAW 09]

Although Russians seem to think the sanctions will not hurt Interfax carried today nothing but economic PRs---there seems to be an apparent disconnect within their nationalism among the general public vs the business elites.

13:29 Russians do not fear Western sanctions - poll


15:30 Shuvalov: Russian gov't has plan of action in the event of strong economic decline

15:28 World Bank sees capital outflow from Russia at $85 bln this year, but $150 bln possible (Part 2)

15:24 World Bank: Russian bank sector sanitization welcome; Central Bank needs clear criteria

15:21 Bashneft minority shareholders offer buy-out at 26.4 bln rubles, company may buy up a third less

15:06 World Bank cuts Russian growth forecast, sees GDP decline in 'shock' scenario

15:04 No ban on buying foreign software, but cos should chose partners carefully – ministry

14:39 S&P downgrades Atomenergoprom 'BBB' rating outlook to 'negative'

[Firn]

The Soviet Collapse, an article in 2007 by Yegor Gaidar.

Yegor Gaidar is director of the Institute for Economies in Transition in Moscow. Between 1991 and 1994, he was acting prime minister of Russia, minister of economy, and first deputy prime minister. Between 1993 and 2003, Gaidar was a founder and a co-chairman of the Russia's Choice and the Union of Rightist Forces Parties, and a deputy of the State Duma.

That second part of that quoted text caught my eye immediatly:

There were several factors which pushed me to write this book. The first was the rise in oil prices, which in real terms have started to approach the level of the late Brezhnev period. The second was the disturbing tendency to mythologize the late Soviet period in current Russian society and popular culture. These myths include the belief that, despite its problems, the Soviet Union was a dynamically developing world superpower until usurpers initiated disastrous reforms. At least 80 percent of Russians are convinced of this flawed interpretation of history.

Historically, such myths have a dangerous precedent--namely, Germany between World War I and World War II. Then, the legend went that Germany was never defeated in the war, but "stabbed in the back" by the Jews and the Socialists. To some degree, the responsible party was the democratic German government, as it was unprepared to publish materials about what really happened before and after World War I.

The notion that the high hard income from the oil shock prices set bad incentives far higher public spending, the Afghan adventure and misallocated investment sounds plausible. This imperial overspending made the whole system inreasingly vulnerable to low revenue due to higher production costs and lower market price.

In 1985 the idea that the Soviet Union would begin bargaining for money in exchange for political concessions would have sounded absolutely preposterous to the Soviet leadership. In 1989 it became a reality, and Gorbachev understood the need for at least $100 billion from the West to prop up the oil-dependent Soviet economy. According to chairman of the State Planning Committee Yury Maslyukov:

We understand that the only source of hard currency is, of course, the source of oil. . . . If we do not make all the necessary decisions now, next year may turn out to be beyond our worst nightmares. . . . As for the socialist countries, they may all end up in a most critical situation. All this will lead us to a veritable collapse, and not only us, but our whole system.[7]

History doesn't repeat itself in the same manner but the patterns seem to emerge in a strinkingly similar fashion. So far the commodity prices are still high, and the Europeans are still buying Russian gas.



It seems that the 'Russians' had recently the tendency to invade non-aligned countries right after another all-time high oil prices. 1979, 2008, 2014...

[OUTLAW 09]

This is an interesting PR as there were some who said that prior to sanctions the economy might not break over 0% GDP for this year if the sanctions came in which hurts badly the general population as the economy has been struggling in a recession for the last year. Inflation was also anticipated to be in the 5-6% range.

16:44 HSBC cuts Russian GDP growth forecast to 0.6% in 2014, to 1.2% in 2015