Streetwise Professor

February 23, 2009

Hey Bobabrebop

Filed under: Economics,Politics,Russia — The Professor @ 6:08 pm

Willem Buiter  (former chief economist of the EBRD, LSE prof, well-known international economics advisor, FT blogger) is not renowned as a member of the anti-Russian cabal, but apparently he has joined our dark coven of delusional Russophobes who project their wishes for the country’s demise on their interpretation of reality:

Russia has gone from Himmelhoch jauchzend to zum Tode betrübt* in the space of less than a year.   With oil at $140 a barrel and $460 bn of foreign exchange reserves, Russia felt and acted like a would-be super power.   With oil at $40 a barrel and reserves draining fast in an unsuccessful attempt to stabilise the Rouble without raising interest rates, Russia looks increasingly like Venezuela with nukes.   Industrial production has collapsed and the public finances are under severe strain.   Russia’s industry has borrowed heavily abroad, in foreign currency, and on a short-term basis.   Its banking system can no longer fund itself in the international wholesale markets.   Russia 2009 looks more and more like Russia 1998.   Capital controls would be an obvious tool to regain control of the Rouble without having to engage in immediate heroic monetary and fiscal policy tightening.   Even if the anti-capital controls faction in the Russian leadership wins the ongoing argument with the pro-capital controls faction, events may well force the hand of the authorities.

Venezuela with nukes.  Is that a promotion from Burkina-Faso with missiles?  

Needless to say, I agree with Buiter’s analysis, and only wonder what took him so long to come over to the dark side;-)

For some weeks, I have been floating the idea that Russia would resort to capital controls given that the other policy choices available to the country–blowing through reserves to prop up the ruble, jacking up interest rates to achieve the same end, or letting the ruble drop considerably further–are very unpalatable. The possibility of capital controls had received very little attention in the press, but now there is a minor boomlet forming.  It has been mooted by an important business/political figure in Russia, and now Buiter, a solidly European establishment figure (not a neo-con American Cold Warrior) suggests that it is a highly likely outcome because of Russia’s dire economic circumstances.  Serious contemplation of capital controls is, as I’ve argued, a reflection of the fact that Russia inherently has fewer policy tools at its disposal than the US.  

The FT has another article that illustrates the acute Russian policy bind:

Western bankers are increasingly anxious about Russian companies’ ability to repay $500bn in foreign corporate debt after the government said this month it was suspending a $50bn bail-out programme as reserves dwindle.

Bankers are queuing up to meet government officials in a scramble for clarity after Igor Shuvalov, first deputy prime minister, said during a closed-door briefing this month that Russia was going to switch focus from bailing out tycoons to supporting the banking system. “The issue is how much state support will the government provide,” said one international banker involved in talks.

The policy shift has sparked a high-stakes poker game between foreign lenders, the Russian government and the country’s oligarchs as some bankers angle for state guarantees in order to go ahead with restructuring deals, while the government resists as it runs out of funds. In the middle are the oligarchs who, in order to survive, must win restructuring deals on more than $130bn of debt due this year.

. . . .

If there are any large defaults, bankers say they could stay away from Russia for years to come. The stand-off could also determine the direction of the country’s economy as questions are raised over whether the oligarchs should keep their empires, and infighting escalates between liberals and conservatives in the government over Russia’s evaporating hard currency reserves. “We are at a turning point in Russia,” said another senior western banker.

The government is in shock, bankers say, after the central bank’s reserves sunk from $588bn at their peak last summer to $386bn in early February as it defended the rouble against a slide exacerbated by the government’s own policy: the step-by-step devaluation it launched to shield the population from a sharp fall. Businessmen took advantage of the situation to make lucrative one-way bets against the rouble and a lot of these funds ended up on the accounts of Russian commercial banks. Some bankers estimate up to $110bn could be held, but it is not clear how much of these funds have been siphoned off abroad.

VEB, the state agency via which the central bank had agreed to disburse $50bn in bail-out for companies’ foreign debt, has confirmed it has suspended the refinancing programme. “We are not taking any more applications,” it said.

. . . .

As the crisis deepens in Russia, the government also faces increasing domestic spending needs, leaving it uncertain how much cash it will have to help refinance corporate debt. One of the bankers involved in talks with the government, said: “They are trying to work out how much the budget deficit will be and how much money they will have to bail out companies … This is absolutely uncharted territory for them.”

But bankers say the continuing lack of clarity over which companies will receive state aid since the VEB programme was cancelled is complicating efforts to agree restructuring deals. “The lack of clarity is a disaster in terms of winning the backing of credit committees,” said one western banker. “People’s confidence levels are at bottom.”

Several familiar themes intersect in this story.  The first is the opaque, political mechanism for allocating state support.  This speaks to the “natural state” character of Russia, and the potential for conflict in such a state when the rents that hold factions together dissipate.  The second is how the institutional weakness of Russia makes capital suppliers very reluctant to deal with it in the current straitened circumstances, and how the country is at risk from being excluded from international capital markets for a very long time.  The third is that $600 billion may have seemed like a lot at one time, but is plainly inadequate to meet all of the competing demands in the ongoing existential crisis.  As I said to former farm boy Michel in an earlier comment, the sow has only so many teats.  Available resources are inadequate to satisfy the competing demands/needs of oligarchs, siloviki, the military, imperial ambitions, western bankers, and oh yeah, I almost forgot–the Russian people.  So VEB is pulling back for now while priorities are determined; resources tallied; battles fought; and decisions made–or not.  To switch metaphors, somebody–many somebodies, actually–is going to get pushed from the lifeboat.  And in a political system like Russia’s, that will be a very, very messy process.  




*The composite online translation seems to be something along the lines of “from sky high to death.”

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  1. I love this: “The government is in shock, bankers say, after the central bank’s reserves sunk from $588bn at their peak last summer to $386bn.”

    We have been talking about this for how long already? Months? Does not the Russian government own any calculators? If they had borrowed an abacus from the closest rynok (market), they should have figured out that the money was going to run out sooner than later. The Russian media (the online newspapers in any case) have been predicting for months that the money would run out in the spring if the government didn’t cut back on the billions it was spending daily.

    Makes me wonder what those millions of FSB/MVD/Bureaucrats actually do if they can’t even send a memo to the Kremlin to let them know what every smart journalist/economist knew. I am sure that at least one bored FSB agent has been monitoring this blog, so it is not as if nobody knew 😉

    Comment by Michel — February 23, 2009 @ 6:34 pm

  2. Yes–deer in headlights. I think they have just been hoping against hope that somehow things would turn around And you’re right, I give the all this analysis and advice for free! If they’d been paying heed in September, they might have taken actions that could have mitigated (but not eliminated) their current difficulties.

    The ProfessorComment by The Professor — February 23, 2009 @ 8:52 pm

  3. It is sad when countries such as Nigeria cite Russia as an example not to follow. This from Vedomosti’s SmartMoney: “На прошлой неделе председатель ЦБ Нигерии Чуквума Солудо выступил с крайне неприятным для национальной гордости россиян заявлением: «Мы не хотим повторять российский опыт траты золотовалютных резервов на поддержание валютного курса».” You have the Chairman of the Central Bank Of Nigeria saying last week that they do not want to repeat the Russian experience of spending the gold and foreign currency reserves to support the national currency 😉


    Comment by Michel — February 24, 2009 @ 9:33 am

  4. Russia’s goose is cooked. It’s going to be intersting to see in a year or two to come which Axis of Oil Thugs country – Russia, Venezuela, Iran – actually has a change in gov’t first. Well, if any, I’m betting on repression becoming very severe in all three.

    Sadly, Russia has no viable opposition that is organized to take advantage of this change in events. The last rally I saw on the news last week was a bunch of pensioned Sovoks rallying for Communism’s return replete with a picture of Stalin no less in the photo.

    Bailing out oligrachs that are in the commodities business in this downturn has been stupid. Russia has the misfortune to have very fragile demographics compared to Venzuela and Iran with big pension obligations. If Russia defaults on debt twice in a decade it will be decades before foreign capital returns. They either return to the incompleted business of forging a civil society, a poorer one, I doubt it, or they grind along through history as a failed state, Zimbabwe with ice.

    All three of these places are going to get a lot more dangerous as they implode. I hope Obama has figured that out.

    Comment by penny — February 24, 2009 @ 4:38 pm

  5. It does not seem there is much left in the reserve funds. According to RIAN:

    MOSCOW, February 25 (RIA Novosti) – Russia’s federal budget deficit will amount to 8% of GDP, including spending from the National Wealth Fund, Finance Minister Alexei Kudrin said on Wednesday.

    The Finance Ministry divided the former Stabilization Fund into the Reserve Fund, designed to cushion the federal budget against a plunge in oil prices, and the National Wealth Fund, designed to help Russia carry out pension reforms, on February 1, 2008.

    Russia’s Reserve Fund stood at 4.9 trillion rubles ($137 billion) and the National Wealth Fund at 2.9 trillion rubles ($84 billion) as of February 1.


    So, according to this article, Russia only has $221 billion left in their reserves. This is less than a third left of the money they had in August when they went to war with Georgia.

    Then the article continues:

    “A deficit of 8% of GDP is in our opinion the maximum deficit we can afford in our country,” Kudrin said, adding that the government was planning to pump about 2.7 trillion rubles ($75 billion) into the economy, including money from the Reserve Fund.

    Kudrin said the 2009 budget was being adjusted proceeding from a 2.2% decline in GDP, 13-14% inflation and the average yearly Urals blend oil price of $41 per barrel. [End]

    So you have 221 billion left, and you plan on spending another 75 out of the reserves [where else will the money come from?]. This leaves you with $146 billion dollars, and you will still have an 8% of GDP deficit. Of course, the $146 billion dollars left will be spent quite quickly if they continue defending the ruble even at its lower level.

    So, I wonder what they will do if the crisis lasts more than a year? 😉 Also, with this little money left in the reserves, it looks like Russian companies will be definitely defaulting on their loans this year…

    Comment by Michel — February 25, 2009 @ 9:22 am

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