Streetwise Professor

Putin’s LSD flashback of a presidential speech continues to attract comment, most of it critical, bemused, or shocked. (Maybe the deviously clever CIA has drugged him!)

His remarks about the holiness of Crimea have sparked the most commentary. A common reaction is that it was a misstep, not because it was delusional, but because it affirmed Ukraine’s claim over Crimea because the sainted Vladimir the Great* was Grand Prince of Kiev:

“Prince Vladimir was Kievan, not Muscovite, and this probably only underlines the right of Kiev and not Moscow to Crimea,” Andrei Zubov, a Russian historian and political scientist, said in an interview.

This is a serious error, because it presumes that Putin believes that the Ukrainian government in Kiev is legitimate, and that Ukraine is an independent nation. He has made it abundantly clear that he believes nothing of the kind. He believes the exact opposite, in fact.

One historian quoted in the linked Bloomberg article indicates that Kiev is of greater significance to Russian Orthodox believers than Crimea. Exactly! Meaning that if Moscow has a sacred duty to claim Crimea, it has an even greater duty to liberate Holy Kiev from the godless Nazi American puppets.

In other words, Putin’s sanctification of Crimea has very dire implications for Kiev.

Of course the reason that Putin uses such hyperbole about Crimea is that it is all he has to show for his machinations of the last year. The price Russia has paid is high, and growing. Hence he must inflate the value of Crimea as well to make it all seem worthwhile.

The rather pathetic economic parts of the speech-which filled up almost half of it-also drew substantial criticism. Commenter Pat right points out that I did not mention one important part:

I propose using our reserves (above all, the National Welfare Fund) to implement a programme for recapitalisation of leading domestic banks, with funding to be provided under clearly specified conditions to be funnelled into the most significant projects in the real economy at affordable interest rates. Furthermore, banks will have to introduce project financing mechanisms.

The use of reserves means investing dollars and euros into “leading domestic banks,” which presumably means Sberbank and VTB, and perhaps some others.  As Pat notes, this is a stunning confession of vulnerability.

What will the banks use these dollars and euros for? They can’t fund their current forex needs due to sanctions. So presumably, the “leading banks” would use the dollars and euros received from the central bank to repay maturing forex liabilities. Thus, the forex assets on the RCB’s balance sheet (e.g., Treasury securities) would be replaced with dollar/euro loans to the banks. How are the banks going to pay these back? This may buy some time, but eventually Sberbank, VTB, and any others receiving the RCB funds will have to raise dollars and euros to pay back the loan, or the RCB will have to extend the loan, or the RCB is going to have to write down the loan in whole or in part. Given that the end of sanctions is nowhere in sight, the first alternative is unlikely. Meaning that the RCB will be replacing high quality dollar and euro assets with very risky dollar and euro assets. The likely outcome is a reduction in CB reserves.

The Central Banks is also spending money to try to prop up the Ruble (or is that the Rubble?) It intervened to stem the post-speech bloodbath on Wednesday, and supposedly spent $1 billion (on top of $700 million spent earlier in the week). It evidently intervened today as well; no reports yet on how much money it spent today.

Drip. Drip. Drip.

Of course, there are other hands out, begging for funds from the reserves. Rosneft, for interest, and other large “national champions.” Again, this would involve the RCB exchanging high quality dollar assets for the liabilities of companies of marginal credit quality, and who can exert political pressure to get favorable pricing terms, and to stall repayment later.

Drip. Drip. Drip.

And of course there are pensions and other “social obligations”.

Drip. Drip. Drip.

Is it any wonder then, why Russian CDS are trading at over 370 bp, wide of every other nation in the world except for Argentina, Venezuela, and Ukraine(!)? Great company, eh? To put things in perspective, Kazakhstan is trading at 15obp, Russia at about 370.

Russia’s government debt yields have gone stratospheric. The 10y is now trading at 11.76 percent. Russia, in other words, dreams of being Greece.

And Putin has no clue as what to do.

Putin also praised Russian athletes, especially the victors at Sochi (no mention of the hockey team, though):

The 2014 Winter Olympics in Sochi played an enormous role in promoting a healthy lifestyle. Once again, I’d like to congratulate our Olympians on their success.

This paean also fell flat, given another news story claiming that virtually all Russian athletes dope:

 As many as 99% of Russian athletes are guilty of doping, a German TV documentary has alleged.

The programme claims that Russian officials systematically accepted payment from athletes to supply banned substances and cover up tests.

The documentary, shown by Das Erste, also implicates the International Association of Athletics Federations (IAAF) in covering up the abuse.

The Russian Athletics Federation (RAF) says the allegations are “lies”.

However, both the IAAF and the World Anti-Doping Agency (Wada) have said they will look into the claims.

The IAAF said it had “noted a number of grave allegations” and revealed that an investigation into some of the claims was “already ongoing”.

The BBC has not independently verified the documentary’s allegations and is awaiting responses from athletes targeted in the programme.

In the documentary, broadcast on Wednesday, former discus thrower Yevgeniya Pecherina claimed that “most, the majority, 99%” of athletes selected to represent Russia use banned substances.

“You can get absolutely everything,” added the 25-year-old Russian. “Everything the athlete wants.”

Pecherina is currently serving a 10-year doping ban that is due to end in 2023. She had already been handed a two-year suspension in 2011.

The entire speech, in other words, would have done Potemkin proud.

* Methinks Putin wants to appropriate that title.