Russia is finding out something interesting

The scale of capital outflows leaves the Russian government in a quandary. The central bank has already raised interest rates by 150 basis points to prevent a collapse of the rouble, but this is choking the economy.

“If rates stay this high for another two or three months, there will be serious trouble,” said Mr Pawlowski. “There is no free-lunch. You can defend your currency, but if you do that you wreck your economy,” said Mr Pawlowski.

While Russia’s reserves of $494bn are enough to defend the rouble, the central bank cannot easily deploy this money in a recession since foreign exchange intervention entails monetary tightening. The money supply collapsed in 2009 when it ran down reserves by almost $200bn to slow the slide of the currency.

Yet it is risky for the authorities to let the rouble keep falling since Russian banks and companies owe $650bn in foreign currencies, of which an estimated $155bn must be refinanced over the twelve months.

The rouble has already fallen 11pc this year. It is becoming ever harder for struggling Russian companies to repay dollar debts.

That interesting thing being that if you’re going to have an open market economy then you’ve actually got to have an open market economy.

Sure, you can have an autarkic and not very market economy which allows you to get up to pretty much whatever you want to. Much as Tony Benn (and to some extent today, Ritchie) argued for. But if you want to get that foreign capital, that trade, that makes everyone so much richer then you’ve got to keep playing by those open and free market rules. There really is a choice here but it’s an either or choice.

What you don’t get to do is take advantage of the foreign capital and the trade and then start playing silly buggers with any part of the overall system.

Worth noting that much of the left’s hatred of things like the Washington Consensus is exactly because it is making very much the same point. Yup, you do indeed give up many of the opportunities for social engineering by opening up the economy. It’s worth it because of the wealth that is then generated: the left, perhaps implicitly, insisting that the social engineering is far more important than any mere wealth creation.

16 comments on “Russia is finding out something interesting

  1. According to the Left, wealth creation is unnecessary. QE has created the Magic Money Tree thus making the Socialist Utopia a matter of time.

  2. There will be some on the left (no sorry guys, I can’t say there are many of you, not without the evidence) who will smart at being lumped in with Ritchie. Well the simple answer to them is it’s your own fault I’m afraid. Your trust funds and your unions pay him to write shite and you don’t correct his nonsense.

    So Frances agrees with him, because he said so and she didn’t correct him. So it’s now fact, forever set in stone.

  3. While Russia’s reserves of $494bn are enough to defend the rouble…

    Assuming those dollars are still there. Who wants to bet there’s been a hand or two in the cookie jar?

    What you don’t get to do is take advantage of the foreign capital and the trade and then start playing silly buggers with any part of the overall system.

    That’s always been Russia’s problem, though. They’ve never quite understood how international trade and relations work, hence they can invade Crimea, feel very smug, and then belatedly realise their economy and state companies are going to get hammered, thus setting their living standards back yet another decade. Then they throw their toys out of the pram and the injustice of it all, and start the cycle over again. When I did business in Russia, I got the impression they thought they were far smarter than everyone else, but in reality they didn’t really have a grip on the basic concepts of business, trade, and cooperation.

  4. Can someone explain this to me please?

    If the naked paper short-selling of precious metals continues, and then the Americans reverse their tapering, and the Russians printed more rubles, and the Chinese eased the Yuan peg in response, would Russian and Chinese central banks be able to buy up all the gold and silver at no “real” cost?

    At that point, they’d be converting their newly-printed currency into hard assets, without the usual currency depreciation and in-house inflation that would normally be the consequence?

    What am I missing?

  5. The rouble is a petro currency. So one way to defend it is to engineer an oil price hike.
    What countries do you think Russia will interfere in next, then?

  6. BiF,
    Yes, it is indeed a petro-currency.
    The Russian stock market is looking cheap at the moment, particularly for foreign buyers. Given that the Ukraine “crisis” seems to be abating, could now be a good time to buy?

  7. Then they throw their toys out of the pram and the injustice of it all, and start the cycle over again.

    For a thousand years their economy has been based on either beating peasants until they cough up their crops or beating Jews until, well, they immigrate I guess.

    I can understand they will get a little upset when they come across people with money they can’t beat with ease. But given they have assassinated people in Britain – and they seem to be doing so in Ukraine as we speak – I am not sure Cameron will be shooting off his mouth for long.

  8. Does Russia actually need to follow the rules of trade etc? Or at least as much as others need to? Ditto Argentina. They can feed and heat themselves. Denmark OTOH probably does need to follow the rules. My guess is that Denmark is a safer place to invest a as a result, and why Argentina defaults every few years.

  9. Luke – “Does Russia actually need to follow the rules of trade etc? Or at least as much as others need to? Ditto Argentina. They can feed and heat themselves. Denmark OTOH probably does need to follow the rules. My guess is that Denmark is a safer place to invest a as a result, and why Argentina defaults every few years.”

    Can Argentina heat themselves? Even if they can, I expect they will want heart medicine. They will want cars. Sony Play stations.

    Argentina defaults every few years because they are Argentinians. Culture is destiny. The only reason the Greeks and Italians don’t is because their defaults are smarter and they have the rest of Europe to back them up. And pay off their debts.

  10. Russia is learning what the UK learned over Suez in 1956: you
    run counter to American policy and you get a crippling run on your currency and economic warfare. Then the US invades Panama because that canal is vital to their interests. Anybody who thinks there is International Free Trade absent foreign policy is a loony.

  11. @DBC Reed

    Well, if you’re going to take on the biggest hardest kid in the school you’d better be sure you’ve got the chops to survive the encounter.

    I have the feeling that his whole strategy has been building for some time off the back of US political and military failures in Iraq and Afghanistan, and the Eurozone economic mess.

    What has rather queered his pitch is the US becoming energy self sufficient, it’s given them the opportunity to mess with his economy with comparatively little risk to themselves.

  12. The US Federal Tyranny may fancy themselves as “the biggest, hardest kid on the block” but they are bankrupt and printing $85 billion a month to keep their heads above water. As far as I could care the USG, EU, Putin and both types of Ukranian govt thieves can all fuck off–but if they succeed between them in bringing the whole economic house of cards down, they will bring it down on all of us, not just themselves.

  13. I was just beginning to believe in ‘the markets’. And now you say that because russia has upset someone they can’t carry on business as usual;.
    As well how does China – a sort of mate of Russia – fit in all this. It too has territorial ambitions

  14. John,

    “The markets” believe Russia is not going to back down over Crimea. This is a good betting position, I think.

    The collective also seems to believe that Obama + EU are going to do something additional that will make business with Russia more difficult in the future. They don’t know what but they are rationally, if not necessarily prophetically, discounting future business or current debts with Russian entities. Some believe it won’t be as bad therefore are lining themselves up for a bit of high risk, high potential reward contrarianism.

    This is roughly what we would expect under a non-trivial version of the efficient market hypothesis?

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