Why has the Russian economy plunged SO SUDDENLY into the toilet?
Hint: ALL banks are American banks
Worstall @Xmas The best economic fun of the past few weeks has been watching the meltdown of the rouble and the associated problems in the Russian economy. OK, “fun” might not be quite the right word: schadenfreude, perhaps?
Real people are undoubtedly, through no fault of their own, being made worse off by what is happening - so fun is almost certainly not the right word. Yet, for the free marketeers like myself, there's absolutely an opportunity to say “told ya so but you didn't listen, did you?” In my specific case there's an added piquancy as I was actually living and working in Russia for two of the last four economic meltdowns in that poor, benighted place.
For those who don't read the financial pages, here it is potted for you. The Russian economy is what is known as a “natural resource” one. It's dependent upon something they're growing, digging out of the ground, both for most of its export revenue and also for most of the tax coming in.
If the global price of that article changes then the economy can roar, with a rise, or crap out, with a fall. This is all pretty standard, as well as being pretty obvious, stuff. The rise in the oil price for half a decade and more made the place seem rich. The fall by 50 per cent and more in the past five months makes it appear poor. At some point the rouble would keel over. Two weeks back it did exactly that.
The actual tumble was humongous by the scale of these things. The fall was going to happen but it could have happened gradually: instead it happened in two days. The trigger there was the sanctions over Ukraine and Crimea. No, let's not get into who is right here, let's just look at the effect.
Certain Russian companies, those closely connected with Vladimir Putin's inner circle, are banned from gaining long term (over 90 days) finance from any bank that has a US dollar biz. That's the way the Americans set it up. Sure, you're a foreign bank, sure, you're lending BuddyofPutin euros and that's fine. Not illegal or anything.
But lookee here, you've this nice business working in USD as well. Be a shame if anything happened to that, wouldn't it? And simply every damn bank has a $ business: all $ trades are cleared through the US for example. So, no bank can lend for more than 90 days to the Putin inner circle people.
One of these people is Igor Sechin and the company he runs is Rosneft (the firm BP sold its Russian business to). Rosneft has a number of $ loans from the old days coming up for repayment. In the normal course of business these would be “rolled over”. Sure, Gospodin Sechin, we'll lend you $5bn so you can repay that last $5bn loan: after all, you've been paying your interest. This cannot now happen. Gospodin BuddyofPutin is now stuck. He can repay the loan but he can't continue to operate the business if he does. So, Russian business comes into play. Or, if you prefer, cronyism, or even BuddyofPutinism.
The central bank decided that loans to Rosneft could be used as collateral to borrow from said central bank (don't worry about these terms, they're boring). So, Rosneft issues $10bn in rouble bonds, the major Russian banks buy them, they'll end up at the central bank as security for the banks borrowing from the central bank. The non-boring non-technical upshot of this is that Rosneft has just got a loan by the central bank printing roubles. That's inflationary and inflation is going to, at some future point, push down the exchange rate.
$10bn-worth of this, what is called “monetisation of debt”, isn't going to affect the Russian economy much. So, given that this happened on a Friday why did the rouble fall by 23 per cent on the Monday? And why did the central bank raise interest rates from 10.5 per cent to 17 per cent on the Tuesday and the rouble still fell again?
Because those markets saw this as a test run for the couple of hundred billion of such BuddyofPutin debt that needs to be rolled over in the next year and a bit. And that most certainly would affect inflation, the rouble and the exchange rate. Markets are forward looking: "they're about to debauch the currency so get out now" sorta thing is what's being thought and said. That was the specific and exact trigger.