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....