Будет Весело! More Rouble Fun

Daniel Brooks

I’m often asked by Russians why I have lived in Russia for donkeys years. Over the days, months and years I’ve tried several answers, saying, “It’s all about the money”, “vodka” and “women.” These answers often fall flat. I would sometimes say, “I admire Russian culture and language”. This is commonly understood as a fondness for money, vodka and women, bringing me back to square one.

The answer that I use most often these days is: “Tyt veselo” roughly meaning, it’s fun here.  Whenever I give this answer, every Russian knows what I have in mind.

‘Veselo’ doesn’t always mean fun in the purely American sense of the word, bringing to mind hot dogs, potato chips and all-around good times. ‘Veselo’ in Russian can have a more complex meaning. It can of course simply mean ‘fun’.  It can also be used with a dose of irony, verging on black humour to describe the feeling one has during difficult times. We are equipped as Homo Sapiens to suffer and remain happy about it in our day to day lives. This instinct comes in handy in Russia, especially when everyone else is having fun, too.

Some of the fun to be had here in Russia included the collapse of the USSR and its economy around 1992, the 1998 crisis when both the government and economy again collapsed, the 2008 crisis, blamed on events outside Russia and more recently, the downturn of 2014. There were a couple of coup attempts thrown in and let’s not forget how the Crimea was annexed by Russia along the way. Ukraine went from being Russia’s close ally and trading partner to an adversary with whom trade is largely a thing of the past. When it comes to ‘veselo’, those of us in Russia have had more than our fair share.

Between 1992 and 2014 it was widely believed that Russian economic performance could be shown on a chart like a bolt of lightning, in reverse. It would go up, dip dramatically and then recover to grow again, moving ever upwards. I like to think I was one of the originators of that chart. Since 2014, the lightning rod seems headed in the other direction. These days, the original chart isn’t used as often. It was a good one, while it lasted.

Since 2014, Russia has settled into an acceptance of slow growth as the new fait accompli. The country has adjusted. Many businesses in Russia have seen their bottom line return to profitability. Forgotten in many industries are profits that were reached during the go-go 90’s and the booming 2000’s. Nevertheless, today’s performance is widely seen as better than the alternative.  Many in the business community came to grips with an economy that was heading for stability with opportunities for growth, known also as stagnation for those pessimists with half empty cups. Some sectors of the economy managed to do well. In the coffee business I happen to know well, demand for fresh roasted coffee and coffee is clipping along at 8-10% growth in tons per year. Coffee shop demand is better yet. Russia recently had a bumper crop of grain. Local food producers are cropping up, replacing imports of dairy, meat and vegetables from those countries who have imposed sanctions. Sizeable investments are being made into Russia’s infrastructure. New apartment buildings are going up all over Moscow. It’s a recovery, albeit not much of one. While Russia has turned a corner with just over 1% GDP growth in 2018 (so far), few are predicting the kind of performance seen between 2000 and 2014, the kind Russia needs to have again.

Last week, as we all well know, the rouble lost its nerve and fell in value from around 62 roubles to the dollar to around 67-8. The reasons for the drop are complex. One culprit are sanctions imposed on Russia by the US, UK and EU governments along other more severe US sanctions, apparently to take place in about three months.

A tougher form of sanction looms on the horizon, giving both the private and public sectors in Russia a case of the jitters. The US Congress is considering a freeze on Russian assets held in the US, promised in November of this year unless a settlement takes place with Russia in the meantime. So far support is bipartisan, a US rarity, and if approved by Congress the sanctions will go into effect whether the US President signs off on it or not. The US and Britain are demanding that Russia prove it does not produce or use chemical and biological weapons and to stop interfering in US elections. To do so, Russia would need to make a tacit admission that such weapons were used, and Russia committed election interference, all of which Russia steadfastly denies. Negotiations on the diplomatic level would need to take place. A wild card would be the US president who prefers to negotiate with the Russian president one on one, without the presence of anyone from the US government, media or citizenry. Meanwhile, Russian assets in the US are hanging in the balance. Or are they?

I’m no expert on how such assets are frozen. To dig deeper, I began by trying to find out what hard currency and bullion assets Russia has. This was a bit more difficult than I expected. I can recall, in the early 90’s, when the value of Russian foreign currency assets was widely reported in a wide range of western media outlets. This happened because, at the time, Russia didn’t have many. Nowadays, western media sources aren’t much help. Russia is no longer the flavour of the month as a growth economy. I had to stop being lazy and look at Russian media sources where this topic remains the subject of much discussion.

Per Russian media reports, Russia’s international reserves, meaning those held outside the country, rose to 455.4 billion USD in March of this year, a record for the previous 3.5 years. In comparison, before the 2008 crisis, such reserves totalled $598 billion. A low took place in March 2009, when reserves fell to $376 billion. Russia seems to be hanging onto its hard currency and bullion reserves for dear life, with reasonable success.

I’ve seen other sources showing that at the beginning of this year, Russia’s share of assets in gold and US Dollars came to 47% of the total. The Euro total was 25%, British pounds comprised 8%, the Canadian dollar, 3% and Australian Dollar, 1%. The Chinese Yuan amounts for .1% of total Russian reserves in foreign assets. If the Chinese Yuan is expected to come to the rescue of the rouble or the Russian economy, it has some catching up to do.  A range of sources seem to agree that Russia holds about 109 billion US$ in assets in the US.  These are the numbers I’ve found on open sources.

Presumably, should Russia’s US assets be frozen, any international transfers made from a Russian bank in hard currency to a bank outside Russia would have a high likelihood of going through an intermediary bank in NY where the vast majority of such funds end up being transferred. This, presumably would subject the transfer to be…frozen. How would Russian banks react? The impact on trade would seem to be significant, if these assumptions have merit.

The US government has given three months’ notice to Russia about freezing its assets, provided such sanctions end up being signed into law. Wouldn’t this allow the Russian government to move their assets to other financial markets and currencies? I’m reading that a move of assets of this magnitude would hurt Russia’s international credit rating. Wouldn’t a downturn in Russia’s ratings be a more favourable course of action to Russia than having 109 billion in assets frozen? If the Russian government doesn’t move those assets, are they playing a game of cat and mouse, seeing if the US will blink first and go ahead with the sanctions? Then what? More negotiations, such as the ones Iran had with the US over several decades? Can Russia sell its assets at all to move it out of the US?  Where can they be moved?  If the US in fact intended to freeze Russia’s US assets, why did they provide a three-month notice period to begin with? As an observer with no deep experience in such financial issues, my only conclusion for now is that time will tell.

It’s widely believed that the fate of the rouble is closely linked to oil prices. If this is true, the rouble should have strengthened as oil prices went up. A quick look at trends, available on line, shows that oil prices steadily rose since September, 2017 from a shave above 50 US$/barrel (crude oil Brent) to between 70 and 80 US$/barrel since April of this year until today. Overall, the rouble has held steady during the same period with periodic small dips above and below 60 roubles to the dollar. It didn’t strengthen as oil prices increased. Oil prices in fact fell in mid-May at a time when the rouble strengthened. Shouldn’t the opposite trend have taken place?  It appears that although the currency is highly dependent on oil, the link between oil prices and the Rouble is not always direct.

As I wade through sources on the internet, several accounts in the Russian media have pointed out that a weak rouble benefits the Russian government. It increases rouble earnings when “Petrodollars” are converted into the Russian currency, helping to fill the budget and fund the government. This outcome is not as favourable to the Russian consumer who can look forward to more inflation. With this benefit to the Russian budget, one has to wonder whether the rouble will strengthen back to 60 to the Dollar any time in the perceivable future.

Perhaps it’s time to dust off everyone’s crisis file and go through the steps taken during a downturn. Cut back costs, collect all accounts receivable, raise prices, minimize overheads, increase the sales forecast for price competitive goods in the assortment, reduce pack sizes and so on. That file hasn’t collected much dust since 2014 and it should be easy to track down. Meanwhile, it’s too early to use the expression “how quickly we forget”. Instead we can now say, this is ‘veselo’.

RussiaKnowledge©Daniel Brooks

August 15, 2018