An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Without a doubt the sanctions have made the road rockier than normal for Russia. That said, alot of what happens is stoked by perception and framing. If a currency has a hard time clearing for a few days, the world doesn't end. Because there is a few months of volatility or a rough patch, it shouldn't be such a big deal. Anybody that trades the Ruble regularly, has known for months that December was going to be difficult because of large amounts of foreign refunding that needed to occur.
If Putin were really concerned, he could take one day's Dollar reserves spent defending the Ruble to provide assistance to pensioners and the poor who may be impacted by the weak currency and imports -- for a year. He could make dollars available for all the Russian companies with loans coming do in this 4th Qtr refinancing crunch period.
In comparison, last week, Norges bank actually cut rates even though the NOK was already under pressure, falling nearly as much as the Ruble in recent months, including last night without much fanfare. Some days, lately, the bid-ask spread get pretty wide, and there simply is no liquidity for most hours of the day. But the Norwegians, somehow carry on... All the political posturing and breathless strategic drama isn't present from their politicians or central bank. Both central banks possess enormous resources, far more than needed to safely see their countries through the rough patch. Exchange rates are mostly determined by supply and demand and to add flourishes of war seem disingenuous. Forex adjustments are a cornerstone of the MMT model, it is one of the big assumptions that make MMT powerful and gives countries greater fiscal space. We shouldn't shy away from it or give in to the temptation to present the markets as rigged or flawed when they are probably the biggest and most fair markets that exist on the planet.
Administration and re-capitalization would work but many of the companies had immediate needs and I don't think that the government was ready or organized enough to have done it without putting companies at risk internationally. They have many assets in foreign jurisdictions that would be subject to foreign bankruptcy proceedings.
I think the Russians fear a currency collapse more than most other countries because of their recent history. They've allowed parallel use of Dollar and Euros because the Ruble was viewed with suspicion and was relatively expensive in terms of interest rates.
Sanctions are an act of war and the companies that didn't have access to dollar funding could probably claim force majeure or frustration to delay payment maybe but even then could have their assets seized and panic in markets would ensure. I don't know Russian law or details on these contracts, I could be wrong.
The way I see it is that no matter what, the Russian government won't let foreign creditors have Rosneft's strategic assets or allow the banking system to collapse and send the economy into a 2008 Lehman style mess, so the companies were clearly able to borrow Rubles at very reasonable rates to replace foreign financing so the central bank was doing their job in one sense but clearly there wasn't enough demand for Rubles from foreigners. So if the central bank / government didn't want the Ruble to fall they should have used their reserves to ensure they maintained their balance of payments with the rest of the world. As recently as month before last, Russia was buying foreign gold so they clearly were not thinking about the Ruble strength then.
In the long term they should modify policy to discourage companies and banks from using funding in foreign currencies where they don't have access to a central bank or don't have a good reason for doing so. One company can be allowed to fail, when all the companies are borrowing in dollars and would fail, it was bad banking/finance policy.
US and European banks using a variety of terms, markets and derivatives. Much of the longer duration financing isn't available because of sanctions though.
So US banks have 100s of billions of rubles sitting at the CBR? Just sitting there in case something comes up like this?
I would think this difficult as Russia always runs trade surpluses..
I think they have no other option than the CB at this point. . So if they are getting shitty terms thay are getting these shitty terms from their own people imo...
The problem is caused by sanctions. The US Banks are not permitted to rollover the loans.
That causes a demand for USD in Russia and is a deliberate act.
The correct response would be for the company to default those loans and sheet home the loss to the source of the problem - with the Russian state backing the recapitalisation.
Now of course it depends on the collateral requirements and other interlinks, but using up USD reserves is probably not appropriate. They should be using those to extinguish the USD *public debt*.
In any case, the worst of the debt rollovers end this month. Once they get through it, the rest of the year should be OK.
Check out the chart in this research article. It shows how many Russians are opting to keep their bank deposits in USD, EUR, and Gold. This is the real threat longer term, more than the immediate USD funding crisis.
10 comments:
Without a doubt the sanctions have made the road rockier than normal for Russia. That said, alot of what happens is stoked by perception and framing. If a currency has a hard time clearing for a few days, the world doesn't end. Because there is a few months of volatility or a rough patch, it shouldn't be such a big deal. Anybody that trades the Ruble regularly, has known for months that December was going to be difficult because of large amounts of foreign refunding that needed to occur.
If Putin were really concerned, he could take one day's Dollar reserves spent defending the Ruble to provide assistance to pensioners and the poor who may be impacted by the weak currency and imports -- for a year. He could make dollars available for all the Russian companies with loans coming do in this 4th Qtr refinancing crunch period.
In comparison, last week, Norges bank actually cut rates even though the NOK was already under pressure, falling nearly as much as the Ruble in recent months, including last night without much fanfare. Some days, lately, the bid-ask spread get pretty wide, and there simply is no liquidity for most hours of the day. But the Norwegians, somehow carry on...
All the political posturing and breathless strategic drama isn't present from their politicians or central bank. Both central banks possess enormous resources, far more than needed to safely see their countries through the rough patch. Exchange rates are mostly determined by supply and demand and to add flourishes of war seem disingenuous. Forex adjustments are a cornerstone of the MMT model, it is one of the big assumptions that make MMT powerful and gives countries greater fiscal space. We shouldn't shy away from it or give in to the temptation to present the markets as rigged or flawed when they are probably the biggest and most fair markets that exist on the planet.
I would pre-pack the Russian companies, eliminate their foreign borrowings via administration and recapitalise them in roubles.
Forcing losses onto foreign creditors and blaming it on sanctions increases political pressure in the West. Western lenders don't like it up 'em.
Administration and re-capitalization would work but many of the companies had immediate needs and I don't think that the government was ready or organized enough to have done it without putting companies at risk internationally. They have many assets in foreign jurisdictions that would be subject to foreign bankruptcy proceedings.
I think the Russians fear a currency collapse more than most other countries because of their recent history. They've allowed parallel use of Dollar and Euros because the Ruble was viewed with suspicion and was relatively expensive in terms of interest rates.
Sanctions are an act of war and the companies that didn't have access to dollar funding could probably claim force majeure or frustration to delay payment maybe but even then could have their assets seized and panic in markets would ensure. I don't know Russian law or details on these contracts, I could be wrong.
What happened yesterday (allegedly by dicey market rumors that were swirling around) when the market failed was that Rosneft issued a 600 billion ruble denominated bond a couple days ago, then used the proceeds to pay off a 7 billion USD note converting all immediately on the spot. They deny they did it, of course, but whether is was Rosneft or any of the dozens of other companies that have been doing the same this month, it would explain the market failure.
The way I see it is that no matter what, the Russian government won't let foreign creditors have Rosneft's strategic assets or allow the banking system to collapse and send the economy into a 2008 Lehman style mess, so the companies were clearly able to borrow Rubles at very reasonable rates to replace foreign financing so the central bank was doing their job in one sense but clearly there wasn't enough demand for Rubles from foreigners. So if the central bank / government didn't want the Ruble to fall they should have used their reserves to ensure they maintained their balance of payments with the rest of the world. As recently as month before last, Russia was buying foreign gold so they clearly were not thinking about the Ruble strength then.
In the long term they should modify policy to discourage companies and banks from using funding in foreign currencies where they don't have access to a central bank or don't have a good reason for doing so. One company can be allowed to fail, when all the companies are borrowing in dollars and would fail, it was bad banking/finance policy.
Ryan how can they issue a bond to raise RUB and then use these RUB balances to redeem a USD note?????
They CANNOT do this.
Or I should say not without exchanging the new RUB balances asset with another entity for new USD balances asset...
What entity do they exchange these assets with? And on WHAT TERMS?
WHO sets the TERMS?
Its NOT "the market"... that is metaphorical as "the market" is an abstraction here ie a figure of speech...
rsp,
If they have rubles and need dollars, they offer rubles for dollars, someone has to buy the rubles...
Yes who is that that exchanges the dollars for the rubles? And on what terms?
Rsp
US and European banks using a variety of terms, markets and derivatives. Much of the longer duration financing isn't available because of sanctions though.
So US banks have 100s of billions of rubles sitting at the CBR? Just sitting there in case something comes up like this?
I would think this difficult as Russia always runs trade surpluses..
I think they have no other option than the CB at this point. . So if they are getting shitty terms thay are getting these shitty terms from their own people imo...
Rsp
The problem is caused by sanctions. The US Banks are not permitted to rollover the loans.
That causes a demand for USD in Russia and is a deliberate act.
The correct response would be for the company to default those loans and sheet home the loss to the source of the problem - with the Russian state backing the recapitalisation.
Now of course it depends on the collateral requirements and other interlinks, but using up USD reserves is probably not appropriate. They should be using those to extinguish the USD *public debt*.
In any case, the worst of the debt rollovers end this month. Once they get through it, the rest of the year should be OK.
Check out the chart in this research article. It shows how many Russians are opting to keep their bank deposits in USD, EUR, and Gold. This is the real threat longer term, more than the immediate USD funding crisis.
Post a Comment