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Russia Wins From Short-Circuiting Western Financial System

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This post first appeared on Russia Insider

Russia's sanctioned state bank VEB will receive an equity injection of 30 billion Ruble (80 million dollars) in part of a wider move to invest more of Russia's capital back into the country and snub western sanctions.

Traditionally, Russia has been running what is effectively a negative carry trade. They have invested sovereign assets into low yielding Western bonds. The banks of those western countries then lent money to Russian banks at extremely expensive rates. Not one of Russia's wisest decisions to make.

<figcaption>Putin and VEB Head Dmitriyev Agree on Russia's New Path</figcaption>
Putin and VEB Head Dmitriyev Agree on Russia's New Path

The VEB investment, which follows similar investments into the other state banks such as VTB and Rosselkhozbank - the Duma approved a 6.6 billion dollar equity injection into the two banks in August, - essentially short-circuits the expensive carry trade. 

Russia has ample ability to finance itself, given that it run a 133 billion dollar surplus in the first seven months of 2014 - which approximately equates to 200 billion dollars for the year. The Federal Government is running a 2% of GDP surplus - highest in 7 years and regional governments are running a 3.2% of GDP surplus. 

Russia has a total of 721 billion dollars of external debts and liabilities as of June 2014 (essentially dollar, euro, yuan denominated debt). Refinancing that debt on its own is not an impossible task. On a state balance sheet of view alone, the Russian Central Bank has around 450 billion dollars of reserves and her sovereign wealth funds have assets of around 200 billion dollars. This is then on top of the trillions of dollars of net-equity that private Russian institutions have. 

Finally, Russia has another clever way of circuiting western sanctions for dollar funding through the dollar pegged Chinese Yuan and Hong Kong Dollar. Trade in these currencies are at all-time highs and are up 10 times on the year. The move, which is part of a great tie-up with China such as the more than trillion dollars worth of energy deals, will not signify a Russia which is isolationist, rather, a Russia which is independent from expensive and risky Western capital and partnered with its own as well as its allies' capital. 

Many in Russia have been calling for a new "economic" model. So far 2014 has more than exceeded expectations. 



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