Uses creative reasoning to show Russia's massive foreign reserves are so small they're not going to last two years
Two well-known economists have lately been making some very strange comments about the Russian economy. One of them Paul Krugman is known for having received the Noble Prize in Economics and the subsequent weekly blurts which prove that the prize itself is heavily inflated.
The other, Anders Aslund we know from him having served in the team of Western economists who on mission in Russia in the beginning of 1990s devised and implemented the form of torture economics known as shock therapy, literally killing and impoverishing millions and millions of people.
Krugman in an incredible twist of facts wanted to argue that the Russian external debt, which is miserly by any standards, now all of a sudden was a great global concern. I dissected Krugman’s arguments in an earlier piece here on Russia Insider.
I wish to complete that discussion here with some comparative figures. According to the CIA World Factbook (2012), the external debt of Russia was $714 billion or roughly 20% of the PPP measured GDP; that of the USA was 15.7 trillion, 90% of GDP; UK 9.5 trillion, 4 times GDP; Sweden 1 trillion, 2 times GDP. – Some problem here for Russia!
Now, let’s see what Mr. Aslund had to say. According to Reuters, Aslund reported that Russia’s foreign currency and gold reserves were according to official data $414.6 billion in the latest week. But this is deceptive, says Aslund. Only half is there, he claims. Smoke and mirrors, but whose?
Aslund backs up his claim by saying that the official reserves includes two "rainy-day" funds, which in his opinion should not form part of the reserves. Said funds were valued at $172 billion. Additionally there was gold worth $45 billion, which Aslund also discards together with $12 billion IMF drawing rights.
I think we need not go into the foolish argument that gold would not be as real a reserve as they come, and same for the IMF rights. More interesting is the $172 billion Aslund pours down the drain in form of rainy-day funds.
One of the funds, Russia's Reserve Fund, by definition hoards U.S. dollars, euros and pounds sterling to insulate Russia against falling oil and gas prices. The other one, the National Welfare Fund, is designed to make infrastructure and business investments with long-term goals.
These reserves cannot be touched because they are to be kept for a rainy-day, Aslund informs us. But, in the same breath he pronounces that the Russian economy is doomed. Sounds like a rainy day to us.
That was rather a childish argument to make, but there is another more fundamental error which make you think if the economist ever took any courses in accounting. It is true that some of the assets of these funds are managed by the Central Bank and thus form part of the currency reserves, but we are sure not all of them.
However, we need not bother trying to find out how much exactly, because the whole argument is phony to start with.
See, Aslund got his porridge and oatmeal all mixed up. It is one thing what the funds are dedicated for, and quite another one in which currency they are held, rubles or dollars or whatever, for all I know perhaps yuan in the future.
Even when part of these funds is now managed by the Central Bank in foreign currency investments, nothing prevents the government from converting them back to rubles. This would imply the funds selling their dollar holdings and receiving rubles in exchange, and on the other end of the transaction the Central Bank would get the same dollars (euros).
The currency does not disappear anywhere. This way you can both keep the reserve funds – in rubles – and the currency as reserves.
Aslund goes from ridiculous to preposterous when he follows up this failed argument with the absurd claim that his imaginary merely $200 billion reserves would be eaten up in the following two years.
In both of 2015 and 2016 – in Aslund’s lyrics – “Russia has net external debt payments equal to $100 billion after subtracting its current account surplus. In other words Russia's liquid reserves would be finished after two years."
That is, Aslund suggests that the Russian national economy from now on stops earning anything, goes into receivership, and all it does is pays off two-years of debt with its last money.
Here we completed the full circle and came back to Krugman’s follies. In the article referred above, we already pointed out to Krugman that Russia’s sovereign debt is $57 billion, and that is the only debt that will be paid off from Russia’s reserves. The rest is corporate debt for which all corporations bear their own liability.
These guys cannot be serious spreading such bilge. Therefore, I must take this to mean that what we are experiencing is a verbal run on the ruble taking place in the Western press with the aid of a number of talking heads.
After having taken part of the discussion that this article generated, I want for clarity's sake reassert that Mr. Aslund indeed was right in stating that the assets of the Russian sovereign wealth funds ("the rainy-day funds", as he put it) form part of the Central Bank reserves, but some of the assets not all as Aslund implies. This far, I agree with Mr. Aslund, but I fully disagree with the conlclusions he draws from it, in particular the assertion that the assets therefore would be locked and not unusable.
Not the Funds as such are part of the Central Bank reserves but the part of them dominated in foreign currency, as long as they are held in foreign currency. The rule is that to the extent that these reserves have been invested in foreign currency dominated assets (which could be e.g. dollar or euro bonds), they are managed by the Central Bank and therefore considered to form part of the reserves. However, this does nothing to diminish their size or value. The Funds are free to reconvert the assets into rubles. As a consequence of such transactions the Funds would get the equal amount back in rubles (having made a hefty ruble gain considering the currency exchange difference), whereas the Central Bank would get the exact same amount of foreign currency back on its balance - this time on its own balance instead of having incorporated them earlier as managed funds.
Thus neither the Funds nor the Central Bank reserves are any worse off as a result of these conventions.