Lex’s output is, to me anyway, not unlike the Oracle at Delphi’s pronouncements to the Ancient Greeks. This is very wide of the mark. Most serious banks are inside the deposit protection scheme.
And where is the collapsing Ruble going to come from. God knows where it closed today but when I posted abut sandwiches CBR rate was RUR25.18/$1. As the sub-prime crisis broke it rose to $25.7x for a couple of days. Not to mention the fact that oil seems to be pushing $80/bbl+.
Maybe, their view was inspired by piece of Buckley-ism.
Russian banks Published: September 20 2007 09:18 | Last updated: September 20 2007 09:18 In recent weeks Russia, somewhat surprisingly, has been touted as a haven in the credit market storm. How safe should investors feel? The Russian economy has been transformed since the 1998 debt default and currency devaluation. High oil prices have boosted economic growth, and the government has built up foreign exchange reserves and sharply reduced its external indebtedness. The same, however, cannot be said of its banks. Anxious to fulfil soaring demand for credit from both corporate and retail customers, these have indulged in an orgy of overseas borrowing. Banks’ external debt has risen from $50.2bn in January 2006 to $110.4bn in April this year, according to Standard & Poor’s, a third of the country’s gross external debt. Three-quarters of banks’ liabilities are funded from loans, bonds and other borrowings, on average, and only a quarter from current and term deposits. Russia’s central bank estimates that nearly a third of this debt is funded from outside the country and much of this is short term, although the proportion is declining. Some of this represents foreign bank funding to their Russia-based subsidiaries, deposits of foreign entities of Russian clients, and other vehicles which are unlikely to carry significant refinancing risk. Nevertheless, S&P estimates that $40bn of foreign currency-denominated bank debt will mature during the next twelve months. Dependence on any one source of funding can be risky. The UK’s Northern Rock came a cropper because it relied on the wholesale credit markets for 72 per cent of its funds. And the UK at least has a broad based deposit protection scheme, unlike Russia, where the government might bail out the large state banks, in the event of a crisis, but where the smaller banks operate without a safety net. Northern Rock, in addition, did not depend on foreign currency borrowing. If the ruble were to fall, Russian banks would find refinancing even more of a challenge. Add in the banking system’s opaque ownership structures and weak supervisory framework, and it is clear that Russia may be a haven, but not for investors seeking a safe bet. [From FT.com / Lex / Macroeconomics & markets - Russian banks]
I have a question. Often when a country faces an appreciating currency people tend to dispare that the countries exports will become more expensive and less competitive.
However, with Russia a large majority of its exports (I believe) are oil and gas based. Is it not true that both oil and gas are denominated in US dollars?
I see to remember that even when countries like France buy oil from countries like Saudi Arabia they pay in US dollars. If, in fact, Russia’s oil and gas exports are denominated in US dollars then a stronger ruble should make no difference for those exports.
Russia is not an export economy for manufactured goods (as far as I know) so please help me understand why a stronger ruble is so bad.
This is a complicated issue and not all commentators agree on a, the drivers and b. the outcomes. Furthermore I am not an economist but I have a professional interest in the correlation between energy prices (principally oil and gas) and currencies (principally RUR/EUR/USD) and a more personal interest in the impact of the “Dutch disease” on Russia. This post is not a bad place to start on all of the above (http://www.rgemonitor.com/blog/setser/215125/)
Yes, theoretically Russia sells its energy for USD in the open market which should in theory mean that CBR accumulates USD as its principal currency. However, CBR has moved over the last few years to match change its reserve make-up for a number of reasons, which has led to the USD accounting for less than 50% of the cash reserve pool. In effect the CBR has a long-term forward selling the USD for the remainder of its basket in expectation of currency movements. Which presumably has them sweating a little in August as the RUR headed back to 25.7 from 25.4.
In answer to your specific question; the concern with an appreciating currency is its impact on the domestic economy. It makes domestic goods more expensive compared with imported and increases inflation – which I have a bugbear over. So at the same time that Russia is trying to diversify away from natural resources its non-natural resource business (be it steel/aluminimum/sun-flower seeds) becomes less competitive and the pricing advantage the former two industries had are eaten away by increased wage and input inflation.
Economics 101 would suggest that as a currency appreciates it chokes off domestic growth thus causing the currency to depreciate (etc). However, classical economists failed to include natural resources in to their models. Foreign currencies continue to accumulate and it becomes increasingly difficult to neutralise currency appreciation leading to stagnation or worse stagflation.
CBR is doing a not bad job of managing the situation but it cannot break the natural laws of economics.
Much of Russia’s future is in the hands of the big USD holders, not least of which is China. Now there’s a conspiracy theory.
Should we then expect Russia to begin selling its natural resources in Euros. Is there a connection between this situation and the new St. Petersburg oil exchange being launched?
I would assume that a number of traders are effectively hedging their $ exposure so that they are effectively linked to the Euro even if the trade is settled in $. More importantly the question you ask points to the flaw in extremely high commodities prices. Yes they are high but it is worse if you are buying and consuming in $. If you are buying or selling in just about any other currency (Euro/GBP/RUR) the weakness of the $ means that oil prices have not risen as much as the headline figure. Does not help much if you are buying gasoline in Texas, hurts less if you are buying gas in Germany. Hurts a lot if you sell you oil in $, have your costs in RUR and are taxed based on $/RUR ex-rate.