The Ukrainian crisis continues to remain vivid on investors’ radar as fatalities on both sides regretfully increase. “We are as close to civil war as you can get,” declared Russian Foreign Minister Sergei Lavrov, early this week and in the same breath he urged both sides to find a peaceful solution.
But with both the US and Russia pointing the blame at each other for stirring up the conflict between the Ukrainian government supporters and pro Russian activists there appears to be no respite in sight to this ongoing crisis. The USA is pushing its EU allies for greater sanctions against Russia but with the EU’s economy having emerged recently from a severe recession and in a fragile state there is no real appetite for this. Europe’s powerhouse, Germany is not keen on any meaningful sanctions, as it is heavily reliant on Russian oil and gas.
Meanwhile, the British are calling for a diplomatic solution to the crisis, bearing in mind that at the centre of Russian oligarch wealth lays British tax havens and multimillion pound London properties. So the British too don’t want to slay the goose that lays the golden egg, certainly not in this fragile economic environment.
Russian leader Putin has probably worked out that he is dealing with the weakest western elite in a generation and he might just be testing how far he can push the redline. First it was Georgia, then Crimea and still no clear redline from the West so Russia may just keep pushing on for more territory.
Moreover, it is not only Russian expansionism that’s ruffling the USA feathers. Since 2007 Russia has been working on a plan, an Independent Ruble system, a financial system based on Russian resources, its own economy and backed by its own gold reserves. In other words, a Russian economy independent from the US dollar and the whims of speculators. “Russia, at its present stage of development, should not be dependent on foreign currencies; its internal resources will make its own economy invulnerable to political wheeler dealers,” said a Russian central bank official.
But Putin may be just too ambitious for Russia, a threat to US supremacy and the powers to be in Washington may think it’s time to topple him. So the economic assault on Russia has begun.
Already capital outflows, money leaving Russia has amounted to approximately $50bn since the start of 2014, this full year figure could be as high as $130bn, according to a Goldman Sachs report. This net capital outflows in the first quarter alone was more than during the whole of 2013, according to a recent report from Alfa Bank.
On the foreign exchange market the repatriation of foreign capital from Russia represents investors selling Rubles and buying either dollar or euro assets, depending on where they reinvest their funds.
The resulting outcome of capital outflows from Russia has been the inevitable depreciation of the ruble, due to the fact that there have not been inflow of capital entering Russia equal to, or greater than the amount leaving Russia. So the negative net inflow of capital has caused the ruble to topple in value against a basket of currencies. The ruble has already depreciated 6.5 per cent against the US dollar this year
Russia’s economy is heavily reliant on the exports of it natural resources namely its oil and gas, which are priced in rubles. Moreover, about 50 percent of the Russian population is sucking on the state’s teat, employed either as civil servants, teachers, public health care worker, pensioners and people on benefits, all of whom rely totally on the state’s income. A devaluation in the ruble means less income earned to pay for its large public sector. A crash in the value of the ruble would see Putin’s budget explode. Perhaps Putin’s great danger is that he may have been budgeting for oil at over 150 USD a barrel at a higher ruble exchange rate to finance public spending
Furthermore, the private sector is relatively underinvested and internationally uncompetitive. The Russian economy is not in a buoyant state. In 2013, Russia’s economic growth slowed to 1.3 percent, its weakest pace since Putin came to power in 2000.
Russia’s Central Bank would not want to raise interest rates in an attempt to support the ruble because this would choke private business investment by making borrowing costs more expensive, which would not be desirable.
Instead, in a desperate attempt to support the currency the Russian Central Bank decided to sell a record $11.3 billion in foreign currency to buy rubles. But it yet remains to be seen if this policy, in the long run, will be enough to halt the tide in the falling ruble. Will the Central Bank throw in the kitchen sink by selling off their gold reserves to support the ruble?
If so this could result in downward pressure on gold prices.
As if a depreciating ruble was not enough to worry the Central Bank, the collapse in demand for Russian debt, bonds has result in falling Russian bond prices on the secondary market and simultaneously pushed up bond yields. Secondary market bond volumes have fallen on the Moscow exchange by 43 percent.
Losses are raking up on funds heavily exposed to Russian assets. Moscow-based Prosperity Capital Management which has $3.3 billion in assets under management fund has fallen 16.2% this year.
As one hedge fund manager put it, “It's a very fast world now," said Nicolas Rousselet, head of hedge funds at Swiss-based investment firm Unigestion. Funds have a position for "one hour, and you take it off."
Darren Winters
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