MOSCOW BLOG: Russia is running out of money – revisited

By bne IntelliNews June 2, 2015

Ben Aris in Moscow -


Last December Professor Anders Aslund, then of the Peterson Institute, now of the Atlantic Council, wrote two op-eds entitled: "Russia's Economic situation is worse than it may appear", and "The Russian Economy is headed for disaster." In both pieces he claimed that with the Russian ruble going into meltdown, the Central Bank of Russia (CBR) would run out of money very quickly and that the official figure of $420bn in international reserves was a fiction: "In reality, Russia’s effective international reserves are only $203bn."  

I wrote a blog in answer at the time entitled, "Russia is running out of money – not…" In it I argued that while about half of Russia's reserves are non-conventional – including its gold reserves and especially the hundreds of billions of dollars held in its two reserves funds – this money was still available to prop up the economy if need be and count as reserves. And in any case the rundown of reserves would be less dramatic than Aslund was predicting. In particular, I took issue with the argument that the 2014 currency crisis was in some way worse than the 2008 global meltdown and Aslund's extremely controversial prediction that Russia's economy would contract by some 10% or more in 2015 was wrong.

Six months on and it is time to assess where we are. The Bank of Finland released a paper in late May looking at the situation with Russia's hard currency reserves and its two crisis funds. Russia has lost a lot of money in the meantime, but it’s nowhere near the panic that Aslund was predicting when investors feared Russia's reserves would run dry. Since December 1, gross international reserves (GIR) have fallen by $64bn to $356bn as of April 30, according to the CBR, and if that pace is maintained, Russia could lose as much as another $125bn this year.

But that pace will not be maintained. In fact, not only has the fall in reserves stopped, as the chart below shows, in mid-May the CBR started buying dollars again and replenishing its GIR, albeit in small amounts, as the ruble stabilises. Even more encouraging were the anecdotal reports that regular Russians were starting to sell the dollars they bought during the worst of the meltdown in December. 

Russia's recession has proven to be a lot milder than anyone expected. The inflationary spike that follows any sharp devaluation of a currency worked its way through the system much faster than economists had been expecting and while Russia's economy is still definitely sick, the outlook for this year has improved considerably: the World Bank revised its GDP contraction forecast to 2.7% for 2015 from its previous forecast of 3.8%. The consensus is for a contraction on the order of 3% with a return to growth in 2016. In other words, this crisis is nowhere near as bad as in 2008-09 and in fact can be just as well described as "a very painful adjustment of the economy to the new realities of a lower oil price."

Drilling down into the $420bn number, Aslund said in his article: "Of this amount, $45bn is held in gold, and $172bn in the two sovereign wealth funds, the Reserve Fund and the National Wealth Fund. The Ministry of Finance controls those two funds, much of which is deposited in state banks or invested, so these funds are not liquid reserves. If we deduct gold and sovereign wealth funds, the official reserves shrink to $200bn. In the last year, Russia's international reserves have declined by $103bn. In the coming year, they are likely to fall by another $100bn, because Russia has to pay back about $150bn a year, while its current account surplus is about $60bn a year."

So what happened in reality to all these numbers? As the table from Bank of Finland shows, gold reserves have increased in the last year from April to April to $47.3bn as the CBR stocked up on the crisis-proof yellow metal. The CBR tapped its IMF special drawing rights (the fund's version of money) for $2.6bn, as well as the two reserve funds for a combined $23.9bn. But the bulk of the money ($107.1bn) was from the "other" category, which includes selling off a considerable chunk of Russia's investment into US Treasury bills, amongst other securities and cash deposits. Bank of Finland said in its paper that 80% of Russia's GIR is in a liquid form by international definitions. 

And these numbers are from April; in just the last month the Reserve Fund has grown to $76.41bn and the National Welfare Fund to $74.92bn as of May 1, the CBR reported on June 1. “Initially the central bank announced a $100-200m daily purchase of FX [in mid-May], but then CBR officials indicated that the volume could be increased,” Alfa Bank's chief economist, Natalia Orlova, said in a recent note.

This year will also see a significant call on Russia's reserves, but like last year they remain manageable. A total of $121bn of debt matures this year, but at least half of that ($56bn assuming a conservative average of $60 for oil) will be covered by the positive current account surplus. And about a quarter of this debt is demoninated in rubles anyway.  Oil was trading at $65 per barrel at the time of writing.

In addition, companies and banks have been stockpiling dollars since the start of 2014, as the ruble was in slow motion devaluation well before the shock of December's tumble against the dollar. One of the side effects of the current problems has been the re-dollarisation of the Russian economy – something more closely associated with the chaos of the 1990s. Hard currency deposits in corporate accounts are up by 44% since the start of the year in April, according to the CBR. Until 2014, companies were maintaining dollar reserves of about $150bn, but this year these have climbed to around $190bn at the end of May, according to Alfa Bank. Banks and companies are actively paying down their international debts: private companies succeeded in refinancing about $10bn of the $40bn that came due at the end of last year, according to Bank of Finland, and from the $32bn of outflow in the first quarter of this year $29bn went to pay off corporate debt.

The bottom line is that Russia still has plenty of money available to meet its obligations this year. In December, the more restrained analysis said that even with the jump in capital flight, Russia had at least two years’ worth of reserves. Now the pace of capital flight has slowed, even if Russia continues to burn through $60bn-100bn a year, it still has reserves to last another three to six years before running out of cash. And that is assuming the current poor conditions persist. Given that Russia is expected to return to growth next year, it seems almost certain that Russia has "made it" through the crisis and will emerge leaner and largely debt free – good conditions to start another boom provided the issue with sanctions can be resolved, which is far from certain.

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