Showing posts with label Russian reserves. Show all posts
Showing posts with label Russian reserves. Show all posts

Friday, August 28, 2015

28/8/15: CBR and Ruble: Fiscal Balance in Oil's Shadow


As I noted earlier this month, Russia has officially entered the recession. The key drivers for 3.4% contraction in 1H 2015 were the same as the key pressures on growth back in 2H 2014: oil prices, investment collapse on foot of high interest rates, inflationary environment that restricts CBR's room for cutting rates, and sanctions (or rather geopolitical risks and pressures, linked in part to sanctions).

That said, in June and early July there were some hopes for economy starting to stabilise, although fixed investment was down 7.1% y/y in June, marking 18th consecutive month of y/y declines. These are now once again under pressure and the cause is... oil price.

Here is how closely paired has Russian Ruble been to oil prices in trend terms since July 2014, although correlation was weaker in preceding period. Overall, as the chat shows, there are two very distinct periods of Ruble valuations catch up with oil prices: June 2014-February 2015 and mid-July 2015 through present.


Russia's Central Bank is switching between little concern for Ruble to interventions and back to staying out of the markets appears to be more than a simply random walk. Instead, it is a game consistent with rebalancing Ruble valuations to fit budgetary dynamics.

The reason for this is that (as shown in the chart above) Ruble strengthening above oil-linked fundamentals earlier this year was an actual threat to budgetary dynamics, and over the last couple of weeks, correcting valuations of Ruble re-established closer connection to oil prices. Hence, in July, CBR managed to deliver a shallower cut to interest rates (-50bps) compared to June (-100bps).

With CBR continuing to stick to its June 2016 forecast for inflation to fall to 'under 7%' by then and hit 4% in 2017 compared to July 2015 CPI at 15.6%, Russia went on to issue its first CPI-linked bonds / linkers amounting to RUB75 billion (OFZ-IN, 8 year notes) at 91% of nominal, on cover of RUB200 billion (more than 25% of demand coming from foreign investors). Real yield at issuance was 3.84% - relatively high-ish, implying underpricing of the bond in a market with relatively hefty demand and forward expectations for significant easing in inflation. Something is slightly amiss here.

In line with up-down interventions, the CBR continued to trend flat on foreign exchange reserves. End of June, total Russian FX reserves stood at USD361.575 billion, and by end of July these fell to USD357.626 billion. As of last week, the reserves were back up at USD364.6 billion.


Weekly data from CBR does not allow for compositional analysis of reserves, but looking at the monthly data the pattern repeats.


Actual liquid FX reserves and gold stood at USD347.1 billion at the end of July against USD350.957 billion at the end of June. This is barely up on end-April period low of USD345.373 billion, although well within the FX- and gold-valuations range of change.

Meanwhile, data through July 2015 shows net purchases of dollars of USD3.76 billion against USD3.831 billion in June and USD2.531 billion in May by CBR. Overall, from January 2015 through July 2015, CBR bought (net) USD7.8 billion and there were no net purchases/sales of euro.


All of the above suggests that CBR will likely resume rate cuts if Ruble firms up from its recent valuations. Two weeks ago, RUB/USD was at 64.947 (72.197 to Euro), peaking at 70.887 four days ago (82.373 to the Euro) and currently at 66.8875 (74.984 to Euro), not exactly warranting a move by the CBR yet, but back in the relative comfort zone for the Bank to sit on its hands once again.

Thursday, June 18, 2015

18/6/15: Russian Central Bank Targets Rebuilding of Foreign Reserves


Recently, speaking at a banking conference in St Petersburg, Elvira Nabiullina, head of the Central Bank of Russia outlined the CBR position on foreign exchange reserves. Nabiullina note that Russian reserves are large - sufficient to cover almost 11 months of imports. However, Nabiullina's 'comfort zone' target for the reserves to cover 2-3 years of "substantial capital outflows", implying she would like to see Russian reserves rising back to USD500 billion mark. Nabiullina is now targeting purchases of forex over the next few years to drive up reserves and to that objective she has been buying on average USD200mln worth of forex per day since mid-May.

In line with forex reserves rebuilding objective, Nabiullina cautioned about markets expectations of further large scale cuts to interest rates as the CBR is trying to balance out inflation targeting (requiring tighter monetary policy), investment supports (requiring looser policy) and accumulation of reserves (implying looser policy).

Per Nabiullina: "Attempts to reduce the interest rates too fast or even acquire certain assets may simply lead to stronger inflation, to an outflow of capital or to dollarisation of the economy, and that would slow down the economic growth, other than promote it."

In its latest outlook, CBR forecast unemployment reaching 6.5% this year from the current rate of 5.6%, before falling to 5.6-5.8% by 2018. GDP is expected to shrink 3.2% in 2015, returning to trend growth of 1.7-2.4% around 2017-2018. Inflation is expected to hit 11% at the end of 2015 with rather optimistic outlook for a decline to "less than 7%" by June 2016, and "close to the target level" of 4% in 2017.

Net capital outflows are expected to decline from USD90 billion in 2015 to USD55-65 billion in 2018. "We are expecting the financial sanctions against Russia to remain in place. Payments on foreign debts during this period will constitute the bulk of the capital outflow. It will gradually reduce from $90 billion to about $55-65 billion during 2015-2018, depending on the scenario," according to Nabiullina.

Russian International Reserves reached USD360.6 billion at the end of last week, up on USD356 billion low registered in April 2015. Still, the reserves are down USD117.7 billion y/y (-24.6%) and down USD132.73 billion (-26.9%) on pre-sanctions period.



Wednesday, April 15, 2015

15/4/15: Russian Foreign Exchange Reserves


Few weeks ago, based on the three weeks data from the Central Bank, I noted an improvement in Russian Forex reserves, while warning that this requires a number of weekly observations to the upside to confirm any reversal in the downward trend.

Now, with monthly data available for the full month of March, my concerns about temporary nature of improvements have been confirmed. Full month of March data shows a decline, not a rise, in forex reserves. Specifically, total reserves dipped from USD360.221 billion at the end of February to USD356.365 billion at the end of March - a m/m decline of USD3.856 billion.


Now, in monthly terms, March decline was the smallest since October 2014 and the second smallest (after September 2014) in 17 months. Nonetheless, forex reserves are now down to the levels of March-April 2007, having fallen USD129.766 billion y/y (-26.7%). Over the period of sanctions, total reserves are down USD136.961 billion (-27.8%). Over Q1 2015 the reserves are down USD29.095 billion.

Month on month, foreign exchange reserves (combining foreign exchange, SDRs and reserve position in the iMF) are down USD4.338 billion, with USD3.646 billion of this decline coming from foreign exchange alone. Gold holdings are up USD482 million month on month.

Gold, as percentage of total reserves, currently stands at 13.265%, the highest since November 2000. Gold holdings performed well for Russia over the period of this crisis, rising USD3.917 billion year on year through March 2015 (+9%) and up USD2.684 million since the start of the sanctions.

In terms of liquid cash reserves, foreign exchange holdings are down at USD298.665 billion at the end of March 2015, a level comparable to January-February 2007. end of March figure represents a decline of USD131.024 billion y/y (-30.5%) and the decline during the period of the sanctions is even steeper at USD136.9 billion (-31.4%).




Good news: Russian economy is past the 2015 peak of external debt redemptions (see: http://trueeconomics.blogspot.ie/2015/04/14415-russian-external-debt-redemptions.html).

Bad news: there is another USD54 billion worth of external debt that will need repaying (net of easy inter-company roll overs) in Q2-Q4 2015. Worse news: Q1 declines in foreign reserves comes with CBR not intervening in the Ruble markets.

Good news: capital flight is slowing down.

Bad news: capital flight is still at USD32.6 billion over Q1 2015 (http://www.themoscowtimes.com/business/article/russian-capital-flight-slows-sharply-in-first-quarter/518927.html) although much of that is down to debt redemptions.

Which means there is little room for manoeuvre anywhere in sight - should the macroeconomic conditions deteriorate or a run on the Ruble return, there is a very much diminishing amount of reserves available to deploy. Enough for now, but declining…

As I said before: watch incoming risks.

Friday, March 20, 2015

20/3/15: Central Bank Interventions in Ruble Markets down to Zero in February


Don't hear much of "Panic at the Central Bank of Russia" reports as of late in the Western media - the ones that whipped into frenzy Russia 'analysts' back in November-December? Why, no surprise:



Per latest data, CBR interventions in forex markets defending the Ruble have shrunk in February 2015 to zero for USD and zero for EUR. Yep, zero.

Oh, and the table above shows, the panic of November-December 2014 Ruble crisis - real as it was - was not as bad as CBR supporting Ruble prior to the free float and during the peak of Crimean crisis.

So was the decision to let Ruble float wise? You decide. On the trend, it saved CBR some USD8.5 billion and EUR1.2 billion, even counting in December 2014 crisis.

Tuesday, March 3, 2015

3/3/15: Those 'tanked' Russian Forex reserves


So, according to some Western media, Russian forex reserves have tanked in February 2015. What happened, folks?

At the end of January 2015, Russian forex reserves stood at USD376.208 billion. Of which USD327 was in currency and liquid assets form. The latest data, given to us is for February 20, 2015 when, according to the Russian Central Bank, the reserves dropped to USD364.6 billion - a drop of 3.11% or USD11.6 billion. That's a lot of cash. But is not qualifying it as 'tanked'. Here's a chart plotting all reserves changes m/m


So (incomplete still) data for February puts drawdowns from the Forex reserves at USD11.61 billion against 12 mo running average monthly drawdown of USD10.73 billion. February marks the fourth biggest drawdown in 12 months. Again - large, significant, but 'tanking'?!

What is more critical is the source of drawdowns: how much of this is due to repayment of corporate and sovereign debt? How much is down to changing dollar value of other assets held? How much taken in form of loans to companies and banks (at least in theory or in part - repayable)? and so on.

No, the numbers are not catastrophic. Although they are unpleasant. Just as the gloating in the media is unpleasant: if the U.S. were to cut its external deficit by 2/3rds - what would be the headlines in Western media? And now note: February drawdowns from the forex reserves marked:

  • 2/3rds reduction in drawdowns compared to December (real disaster of a month); and
  • Large chunk of these drawdowns probably (we will know later for sure) went to fund debt reductions of Russian banks, companies and sovereign.



Thursday, January 1, 2015

1/1/2015: Russian Reserves Down USD10.4bn in the Week of December 26th


CBR published data on Russia's foreign exchange reserves for last week (through December 26th), showing another drop in reserves to the tune of USD10.4 billion. So far, since the onset of the accelerated Ruble crisis, Russian FX reserves are down 26.1 billion. December total (excluding December 29-31) decline in reserves is now USD32 billion, which makes it the  worst month for FX losses since the January 2009 when Russia lost USD39.4 billion in reserves. December 2014 so far ranks as the third largest decline month for the entire period for which data is available (since January 1998).

Couple of charts to illustrate:



As of the end of last week, Russian External (Forex) Reserves stood at USD388.5 billion, down from USD420.5 billion in the last week of November. Since the beginning of the sanctions period (from the week of the Crimean Referendum) through the end of last week, Russian reserves are down substantial USD 98.1 billion, while from January 2014 through end of December 2014, the reserves are down approximately USD107 billion. At this rate, and accounting for varying degree of liquidity underlying the total reserves cited here, but omitting the reserves held by larger state-owned enterprises, by my estimates, Russia currently has roughly 18-20 months worth of liquid reserves available for cover of debt redemptions and unrelated forex demand.

Wednesday, December 17, 2014

17/12/2014: Some Ruble-Heavy Reading: Contagion, Reserves & Fundamentals


Some interesting set of articles on the topic I mentioned earlier on Irish radio and in the post here: http://trueeconomics.blogspot.ie/2014/12/16122014-russian-inflation-hot-but.html  - the topic of contagion from the run on Russian ruble to the global economy:




As an aside to the menu of options available to Russian Government, here is one of a 'limited capital control': http://www.nakedcapitalism.com/2014/12/how-putins-fealty-to-the-washington-consensus-made-his-currency-crisis-worse.html aka de-dollarisation of the retail deposits. Surely, that would just amplify pain for ordinary savers.

And another aside: in-depth analysis of the reserves position and demand for debt redemptions for Russia here: http://www.nakedcapitalism.com/2014/12/oil-ruble-ideology.html. Key quote from the article:

"We notice that the strong depreciation of the Rouble corresponds to a peak in repayments, but that the situation will loosen up in early 2015. It is sure therefore that the exchange rate will reverse its tendency in the first semester of 2015. The question is, up to what point? If the Rouble stabilizes around 50 roubles for 1 USD, inflation will be strong next year and could reach 12%. If we witness a rise in oil prices and the Rouble stabilizes around 40-42 roubles for 1 USD, the inflation rate could amount to merely 10%. Still, this implies that the Central Bank of Russia keep an eye on such establishments which could be tempted to speculate on the exchange rate, dragging it farther down than it should normally be. Explicit threats were made by President Putin at the occasion of his declaration of general policies before the chambers of parliament on December 4th. However spectacular it has been, the depreciation of the Rouble by no means puts into question the financial stability of Russia. The trade balance remains in excess, with an amount outstanding of 10 billion dollars a month. This is largely sufficient to face up to coming payments. The budget is actually profiting from this depreciation, which should allow the government to spend a little bit more in 2015. Russia will therefore remain one of the least indebted countries in the world, which is not necessarily an advantage and goes to show that, provided it takes up debts internally, the country wields over a strong potential for investment and development."

Another update: a must-read from Bloomberg's @Bershidsky on why sanctions are at best secondary when it comes to the run on the Ruble:  http://www.bloombergview.com/articles/2014-12-17/lift-sanctions-now-to-humiliate-putin

Friday, November 14, 2014

14/11/2014: Russia Risks Up, but No Panic, yet


Euromoney Country Risk published an interesting analysis of the country risk scores for Russia. Here are some of the highlights (link up once Euromoney produce undated note).


"As sanctions and falling oil prices force the rouble’s slide, country risk experts are questioning the ability of privately owned and/or state backed
banks and corporates to obtain credit and repay their debts amid capital flight and an economy in decline Russia’s country risk score has fallen precipitously this year, in tandem with Ukraine."

The beef is in the details: "An 8.3 point correction since 2013, to 46.2 points out of a maximum 100 available, has sent the sovereign careering 17 places down ECR’s global rankings to 71st out of 189 countries worldwide. That marks a lower score compared with 2008, indeed the lowest since Russia defaulted in 1998, with the sovereign slipping into the fourth of ECR’s five tiered groups commensurate with a B to BB+ credit rating, signalling its triple-B credit ratings are overdue a downgrade."



Per ECR: "Russia’s plight is understandable. Oil prices have come off their peak since June, falling more than $30 per barrel to $81, as of Thursday."

You bet. Here's the updated chart:



As I noted before, oil price leads Ruble, not the other way around. And also note volatility in recent days - as predicted here: http://trueeconomics.blogspot.ie/2014/11/7112014-russian-ruble-rough-days-ahead.html

Back to ECR analysis: "With sanctions causing an estimated $130 billion of capital outflow this year, according to the central bank, the rouble has plunged to $46/$, depreciating by 42% since the end of 2013 and forcing an abandonment of its target corridor in favour of a (virtual) free float absorbing the shock and preventing forex decline."

The point worth mentioning here is that capital outflows recorded are official flows, which include:

  1. Repayment of maturing debts by Russian banks and corporates (which is now becoming a serious issue, given the state of debt markets in the wake of the sanctions); and
  2. Forex positions taken by households and corporates, even when deposits are held inside the country.
  3. In addition, capital outflows reflect exits by financial investment funds, which are not having a direct impact on the economy in the short run, but can have adverse impact on corporate funding and investment forward over the longer term.

For the repayments schedule, see here: http://trueeconomics.blogspot.ie/2014/11/11112014-another-wild-ride-for.html

Experts opinion

"Russia’s FX reserves totalled $429 billion as of end-October, down from $524 billion the year before. The true total is a little lower due to adjustments for the reduced valuation of gold reserves and changes in official agency reserves."

Note, I wrote about the latest foreign reserves position figures here: http://trueeconomics.blogspot.ie/2014/11/11112014-another-wild-ride-for.html these stood at USD416.23 billion at the end of October, excluding IMF-held funds, SDRs, and covering only gold and foreign exchange.

Danske Bank analysts "believe the $50 billion FX repo facility is “reasonable
enough to cover the most urgent needs of Russian corporations regarding their external debt repayments” through to 2016. Some banks, after all, have surplus liquidity that can be redistributed to those in need, and the central bank’s forex stockpile is sufficient to imbue some confidence in averting a crisis."

Kaan Nazli, senior economist at Neuberger Berman "expects a turnaround next year “due to the currency devaluation effect, and as private sector debts are
paid down with refinancing options limited by the sanctions.”

My own comment quoted in ECR note is as follows: I do "not believe a sovereign or even selective (large scale) private sector defaults are likely in the short term in spite of some talk of difficulties. “Such an event is not in the interest of the Russian authorities and can be prevented by using the existent foreign exchange reserves cushion,” he says. However, if oil prices remain low for a prolonged period and, simultaneously, Russian companies’ and banks’ access to foreign funding is severely curtailed, “we are likely to see a significant uplift in sovereign and banks’ credit risk”, he adds."


My 'wider angle' view to add to the above comment is as follows:

In my opinion, Russian Ruble dynamics vis-a-vis the USD and EUR are underlining the overall structural and geopolitical pressures on the Russian economy.

Amongst the structural factors, the largest weight can be assigned to the developing risks to economic growth, that have been at play since H2 2012 and H1 2013.

However, additional pressures are now being presented by the geopolitical factors, namely the crisis in Ukraine and the related sanctions on Russian companies and banks, including the indirect effects of these sanctions.

Decline in the oil prices - triggered in part by the sluggish global demand, and in part by the geopolitical decisions of the Gulf countries to withdraw supply-side support for oil - a having a significant short term impact on Russian exports revenues and are driving down Ruble valuations. Financial sector sanctions have de facto cut off all Russian companies and banks (including those not explicitly covered by sanctions) from the largest foreign funding markets, triggering high outflows of capital (as Russian companies pay down their maturing foreign currency loans exposures instead of rolling them over). As the result, Russian international reserves have been depleted from USD524.3 billion at the end of October 2013 to USD428.6 billion at the end of October 2014 (although one must take into the account reductions in this figure due to lower valuation of gold reserves and changes in official agencies reserves).

Going forward, changes in the inflationary environment, global and Russian economies dynamics, as well as continued demand for corporate and banks' deleveraging from foreign debt exposures, we can expect more downward momentum in the Ruble valuations and more pressure on the Government fiscal position.

However, devaluation of the Ruble and decline in oil prices do not have a linear one-to-one effect on sustainability of Federal fiscal balance sheet, as Government expenditure is denominate in Rubles, not US dollars or Euro. Furthermore, decline in oil prices is also not translating in one-for-one decline in Russian external balances, as Russian economy is capable of very quick and deep correction in imports demands, as 2009 experience clearly indicates.

As the result, in the short- and medium-term (up to 18-24 months), I do not foresee a significant acceleration in the risk of either a Federal or selective (large scale) private sector defaults. However, if WTI price stays for a prolonged period of time (2+ years) below USD95/barrel and, simultaneously, Russian companies' and banks' access to foreign funding remain severely curtailed, we are likely to see a significant uplift in sovereign and banks' credit risk.

Risk of selective (bank of corporate) default event is harder to asses than sovereign risks, but I do not expect - at this point in time - a large-scale event involving any big Russian corporates. Such an event is not in the interest of the Russian authorities and can be prevented by using the existent foreign exchange reserves cushion. The material risk here is that a number of larger Russian banks and companies, impacted severely by the sanctions, are likely to see dilution of the current shareholdings of foreign and domestic investors, as any liquidity support from the Government will likely see issuance of new equity to the state.

Monday, July 28, 2014

28/7/2014: Steady decline in Russian Reserves since Q1 2013


Russia's firepower in financial terms is formidable at USD472 billion, albeit declining since the 'local' maximum at around Q4 2012-Q1 2013: