Russian ruble, safe haven in times of trouble?
Russia let the ruble appreciate against its euro/ dollar basket this week. Not by all that much. But this was also a week many emerging market currencies fell against the dollar, as part of a general retreat from risk.
There likely were modest capital outflows from Russia last week as well, as foreign investors sold their Russian stocks and then convert their rubles into dollars (The RTS is off its late July peak). There certainly were small capital outflows in the first week of August. However, Russia could easily meet the increased demand for dollars out of its reserves (Reserves fell in the first half week of August). Russia now has way more reserves than it needs.
No wonder Credit Suisse calls the ruble a safe haven:
According to Credit Suisse, Russia’s ruble and Brazilian real are the safest assets to wait through forthcoming problems.
The New York Times also took note, earlier this week, of the fact that the Russian ruble is now a currency that a lot of folks — Russians and foreigners alike — want to hold.
Andrew Kramer of the Times wrote:
Russian banks offer accounts in rubles, dollars or euros. Of the three, ruble accounts are attracting the most funds. Ruble-denominated personal savings accounts rose 6.8 percent in the first quarter of 2007, while foreign currency accounts were level, according to a report by Goldman Sachs. …
Last summer, authorities eliminated all restrictions on ruble trading, making the currency fully convertible and easing the way for the capital inflow …. In the first six months of this year, net private capital inflow into Russia was $67.1 billion — more than during the entire first decade after the collapse of the Soviet Union. In the same period last year, capital inflow was $14.5 billion.
Strong demand for assets denominated in emerging market currencies from local and foreign investors alike calls into question the relevance of models that postulate that emerging markets are unable to create the financial assets demanded by the growing economies. At least right now, that doesn't seem to be the case. Central bank reserve accumulation doesn't reflect repressed private demand thwarted by capital controls; indeed, it often reflects the growing desire of the citizens of the emerging world to hold fewer dollars and euros and more assets denominated in their own currency.
After all, oil is still above $70 — far higher than the roughly $45-50 a barrel price Russia needs to cover its (rapidly growing) import bill. The Times' ramer is entirely right to note that the ruble would be much stronger but for the ongoing intervention of the Bank of Russia.
Even more important, as measured by purchasing power parity, a gauge of a currency’s value based on the goods it can buy, a dollar should buy roughly 15 rubles today, according to a report Merrill Lynch issued in July. By that measure, the ruble remains the world’s second-most undervalued major currency, behind only the Chinese yuan, whose value has given policy makers in Washington headaches.
Indeed, the ruble would be even more valuable today if not for the Russian central bank intervening to keep it from rising more.
So would China's currency, despite the Economist magazine's ongoing arguments to the contrary.
But if oil stays around $70, I would bet that some GCC currencies are even more undervalued than either the RMB or the ruble. The Gulf countries collectively have far fewer people and far more oil than the Russia – but currently have far weak currencies. That is a puzzle worth explaining. I consequently am eagerly awaiting an article on the weak Saudi riyal, UAE dirham, Qatari dinar and Kuwait dinar.
i hear that ‘helicopter ben’ is not sleeping too well these nights. it is not so much having to sleep in his flying boots and helmet, in case the beleaguered ground troops call in more air strikes at short notice - it’s more the fact that his mattress is stuffed with russian roubles because nobody in his kind of situation trusts the banks.
“Russian stocks fell on concern that a widening credit crunch may spread through the financial system, reducing investor appetite for riskier assets in emerging markets. OAO Sberbank, VTB Group and OAO GMK Norilsk Nickel led the decline… Since touching a record on July 23, the [MSCI] Emerging Markets Index has fallen 10 percent… Nickel prices hit a 10-month low…” http://www.bloomberg.com/apps/news?pid=20601095&sid=atBTtB9mmduQ&refer=east_europe
Isn’t it funny how yesterday’s losers are today’s winners. Russia and Argentina, countries whose economies had crashed within the last ten years, are now running twin surpluses. I don’t know if there is a safe currency, but the Canadian loonie, Norwegian krone and the Swiss franc come from countries that I belive are also running twin surpluses. Of those countries, Canada seems to have the best demographics. If Canada was a little less dependent on the US (although, it seems after the recent worldwide, universal stock market tanking, that all countries are somewhat dependent on the US), it would be the country with the safest currency.
I don’t believe in russian ruble as a safe haven. In
a event of US recession oil price will come down. With
no diversification from the oil economy russians will
be in the red once again due to their consumptive and
lavish lifestyle reflected in their rising imports.
But i do believe in brazilian real. they have learned
good leasons.(PetroBras is an ultimate eg of deepwater
technology in oil).Huge upgraded industrial
infrastructure, inflation targeting central bank
check out russian money supply growth…
http://www.economist.com/finance/displaystory.cfm?story_id=9621595
Brazil also seems to have a bit of a poverty/drug problem, whether the flows are sufficient to balance or overcome the apparent instability associated with that trade: http://www.riobodycount.com.br/
August 11/07 - “The Central Municipal Council (CMC) has asked the government to delink the Qatari riyal (QR) from a consistently weakening US dollar and instead peg it to a basket of currencies and commodities in order to curb the rising cost of imports…” http://www.middleeastforex.com/index.php?section=545
“…The Dubai Chamber of Commerce and Industry said this month the Saudi riyal was undervalued as much as 33 percent… a revaluation may bring advantages on inflation but price growth is not as big an issue for Saudi Arabia… “Most Saudi assets are in dollars and if they revalue they will take a loss on that. It’s not something they will do lightly.” http://www.middleeastforex.com/index.php?section=441
“Borse Dubai, owner of the emirate’s two stock exchanges, plans to buy at least 25 percent of Sweden’s OMX AB, potentially derailing a 25.1 billion-krona ($3.7 billion) takeover by Nasdaq Stock Market Inc… “Borse Dubai is hungry for information and experience… OMX will give them access to that in terms of how other exchanges are structured and developed.” …Dubai has used billions of dollars of oil revenue for purchases and plans to invest in financial services to lure companies to the Gulf… OMX, which lists companies including Ericsson AB, the biggest maker of wireless networks, operates in the market for stock-exchange software. The Hong Kong Stock Exchange, the Singapore Exchange and New York-based International Securities Exchange Holdings Inc. run on OMX systems. HSBC Investment Banking is advising Dubai on its bid, while Credit Suisse Group is advising OMX.” http://www.bloomberg.com/apps/news?pid=20601104&sid=aW3RFRsoWirU&refer=mideast
Chinese aren’t likely to loose interest in US assets either: “…Mr. Lin bought an obscure e-commerce business here three years ago and changed its business focus. He then did a so-called reverse merger, in which he bought a tiny Florida printing company with sparsely traded stock, renamed it China Public Security, and turned the software business here into a subsidiary of the American company. Helping Chinese police agencies has been profitable for China Public Security and its investors. The company estimated in May that it would earn an after-tax profit of $12.5 million on sales of $27 million this year. Two hedge funds that bought stakes have more than doubled their money since investing in early February.” http://www.nytimes.com/2007/08/12/business/12securityside.html
I tend to think of NYC, London, Cyprus, Israel and Geneva as being Russian safe havens. Might you be referring only to bank accounts in Russia? And if only 20% of Russians have bank accounts, whether those who do are the ones with the greatest wealth in a country with one of the highest rates of poverty in the world - i.e. how many rubles are we talking as compared to the total value of other ‘Russian’ assets? Is the value of ruble denominated ‘Russian’ financial assets trading in Russia still far less then the value of shares listed in London (sterling) and NYC (USD) - although the price of those assets has to reflect their value in rubles.
interesting links on the gcc
russian money growth is indeed very fast. in the short-run, though, the only way russia can avoid more inflation is a stronger ruble — absent that, the injection of money from past reserve growth will lead russia to miss its inflation targets,big time. so it supports the case for ruble strength.
I don’t have a good estimate of the total value of russian offshore and onshore financial assets. I do not doubt that the stock of offshore assets remains large (one question — is it bigger or smaller than US offshore assets, which are now about 100% of US GDP …). what has changed dramatically is the flows. on net (private inflows - private outflows), russia now attracting substantial inflows (this has been true since 05 i think but certainly was the case in 06 and very much in 07). part of this is new inflows, but part of it is also a fall in outflows. and one reason for the fall in outflows is the growth of ruble deposits as an acceptable savings vehicle.
Guest –
Re: Brazil and “whether the flows are sufficient to balance or overcome the apparent instability associated with that trade”
– we actually know the answer to that question. look at brazil’s reserve growth, which is far higher than brazil’s current account surplus and thus implies substantial net private capital inflows. if you are posting regularly here, i would hope you would know how to find — easily — a first order answer to that question.
The answer to your Brazil comment perhaps laying more in the deterioration or improvement of what’s happening on the ground.
re: “russia now attracting substantial inflows (this has been true since 05 i think but certainly was the case in 06 and very much in 07)” - as RUB/USD appreciation has been seen as a one way bet, whether a violent repricing of assets, like real estate and base metals, might change that in some way - Brazil too. Also interesting to think about differences in the ways that oil, and perhaps soft commodity prices may affect those economies, especially given the relative size of Brazil’s ethanol industry…
re: “interesting links on the gcc” - along with the India connections there. hoping for a more extensive response.
US Government in technical default on debt
The U.S. has hit and gone through the debt ceiling of $8.965 trillion that was set by Congress in March of 2006.
Russian rouble, a safe haven? You must be joking. The authorities seem to make up the law as they go along, and if they don’t like you for some reason, you are toast:
http://www.ft.com/cms/s/238d9512-4610-11dc-b359-0000779fd2ac.html
In my opinion, Russia is not a safe place for your money to be Putin!
i have a somewhat different (call it political realists view) of the seizure of the oligarch’s assets. there was no way that the Russian state could allow the oligarchs to retain control of russia’s oil wealth (often obtained in sort of nefarious ways), and certainly not on the terms many obtained control in the 90s (back when oil was low and folks were making money even then). the oligarchs would have become the state — think of them as mini Saudi royal families or various gulf sheikdoms. the initial transfer wasn’t entirely above board, and the transfer price was too low –
that isn’t to say that I like the way russia has gone about reasserting control - clearly those who kissed and made up with Putin have done far better than those who opposed putin. but allowing the initial transfer without some renegotiation in the name of property rights would have ratified the 90s transfers on terms that would have effectively handed russia’s mineral wealth over to a very small number on extraordinarily favorable terms.
again, this isn’t a defense of the way putin has gone about changing the terms, only a recognition that some renegotiation of the terms was necessary. Otherwise Russia’s $400b in reserves would all be in the hands a few oligarchs (and the entire premiership would be russian owned .. )
and there is no doubt that russians are far more willing to hold their savings in russia today — and foreigners are more willing to invest in russia — even after putin’s various capers.
“today” - or at least until very recently. but whether the ruble, or ruble priced assets, prove to be safe havens is yet to be seen, as the “trouble” may only be beginning and it appears, if necessary, there is tremendous capacity to very quickly change ruble holdings for other assets - although the oligarchs might have to negotiate with the Kremlin should they desire to sell. Wouldn’t call the seizure of assets safe haven buying, whether you do or don’t agree with the appropriateness of those actions and the way things are done.
re: “Russian rouble, a safe haven?…”
- lots of hard assets…
Maybe BEARX is the safest asset.
i was out to lunch today in the beautiful glen of aherlow, county tipperary, ireland. looking at the childrens’ plastic toys on the carpet ( thomas the tank engine ) - all were made in china. are we really aware how interconnected the world has become ? surely a sea-change in the way that the world sees credit would affect all global investment and thus all currencies ? is the rouble safer than the dollar ? was the third class dining room on the titanic safer than the first class dining room ?
to my mind the distinction is not between the rouble and the dollar, but between doing what you are doing (a) with your own money and (b) on credit. leverage is going to be s-o-o-o-o last century.
the chinese imply in a statement today that they are thinking strategically and responsibly. warren buffet and the chinese both think this way ? going opposite ways, perhaps, but both hold strategic reserves.
warren buffet waits to take advantage of distress selling at the bottom of a market crash - if he can guage it. but i don’t think the chinese are thinking ‘profit’ at all. i think they are thinking ‘market share.’
so the analyst should not ask, ‘what should the chinese do to avoid a currency hit ?’ - even accepting brad’s helpful clarification of their position - but “what will the chinese do to defend market share ?’
Maybe LMT is the safest asset
i always hesitate to call a policy that will generate larger losses (to china) on its lending to the US than likely to emerge out of US subprime lending (for $ based investors) — though obviously the scale of suprime losses will vary in all subprime CDO depending on where you stand in the credit structure — “responsible.” I also hestitate to call a policy that has resulted in China’s huge external surplus — and associated rapid money growth and internal bubble dynamics “responsible”. In some sense, cHina’s policy strikes me as both unplanned (i.e. china just clung to a $ peg as the world changed) and irresponsible. but having come this far, china is clearly scared to change.
love the titanic metaphor though — but i do think the first class cabin did do a bit better than the folks in steerage, but my titanic history is very very hazy — and I agree with the bigger point is that there will be no true safe haven if the system collapses in an unpleasant way, though currencies are by definition relative prices so some will do better than others.
though unlike some i also don’t think maintaining the status quo is a wise course either — so i find china’s unwillingness to change in some sense irreposnsible. but i also increasingly fear china missed the best opportunity to change …
There is no conceivable way for “the system to collapse.” Much as the Fed would like us to think, the Ring has not been cast into Mount Doom. The lender of first^H^H^H^H^Hlast resort has a printing press and shows no signs of smashing it.
For this reason, leverage is certainly not “a thing of the past.” Some of the hedgies who have been picking up nickels may need to be peeled off the steamroller wheel. Others will take their place.
The acute crisis of the financial system is a complexity breakdown in the regulatory system. The proximate cause is the existence of a large set of securities whose current market price appears to be much lower than their current regulatory-accounting value.
Investors did not buy subprimes and CDOs because they were stupid. They bought these instruments for a variety of quasiregulatory reasons which seemed politically sound at the time, but since have become invalid.
This is what happens when you speculate on political decisions, a task which by now consumes most of the combined brain and computer power of the financial world - certainly more than it spends on analyzing the productive economy.
For example, pension funds were required to buy AAA-rated bonds, and the ratings were obligingly issued by ratings agencies which had in effect become parts of the federal government, meaning they could face no market consequences for a failure of common sense, such as that implied by models which assumed the future would mirror the past. For example, banks could buy credit protection from hedge funds that were sure to vanish in a stiff breeze, without alarming the creditors of those banks, because the Fed would not let J.P. Morgan fail.
And, most of all, the global central banking system, considered as a unit, was dependent on the incredibly pathological practice of printing money to buy bonds. The “savings glut!” Of course, to the bond market, it makes no difference that the cycle of dilution crossed borders. The Fed printed a dollar, then the PBOC printed eight yuan to buy it, then bought an US mortgage security with the dollar. So? As far as it affected financial markets, Prof. Bernanke could simply have been buying American securities with fresh green Benjamins. The whole Voldemort game is smoke and mirrors.
The result of these abuses was to completely obliterate any semblance of a natural price signal in the money market. All interest rates at all maturities in all currencies were the consequence of official decisions. Price signals were only visible in risk spreads. And even there - as many found to their discomfiture - official action, such as the ratings mess, induced many to buy instruments whose risk was assigned administratively, not inferred by markets.
I state all of these propositions in the past tense. But if they were really past, leverage would indeed be a “thing of the past.” They are not and it is not.
The chronic problem is that “the economy” - in other words, the set of statistics that influence political events - is dependent on these abuses. If they were to be genuinely terminated or even scaled back, a massive “recession” would be inevitable. Some kind of “slowdown” is probably inevitable even now.
If central banks were genuinely independent, they would love a “recession,” because a genuinely independent currency issuer always wants to maximize the price of its currency relative to other goods. This can be done easily - stop creating money. I’ll bet the Fed could drive the dollar up to fifty pounds if it really wanted, assuming of course the Brits didn’t fight back.
Obviously this is ridiculous. So the “Greenspan put” or the “Bernanke airforce” have nothing to do with personalities. Central banks do not have the political power to orchestrate sustained “recessions.” At most they can do what they are doing now - creating shocks that destabilize overextended speculators, and may result in “accidental recessions” that are in fact quite predictable.
The problem is that long-term markets are learning to look past these shocks and see the big picture. And the big picture is that avoiding a “recession” in the present monetary configuration requires long-term interest rates at 5%, and (it seems) short-term rates even lower - combined with asset-price appreciation and money-supply growth above 10% per year.
The difference between these numbers is a hemorrhage of money. It is a river of cash flowing from Printing Press to Bond Market. And indirectly, thus, to voters - who have no knowledge of what it means to be cut off from this river, and no intention of finding out.
The long-term financial effect of this distortion is that any durable good whose price is reasonably sure to ascend linearly with the amount of money available to buy it will beat a T-bill. Over 10 years, the difference between 5% and 10% is pretty big. Especially if you add a little leverage.
And the effect, of course, is even larger if all the speculators pile into the same asset. Such as mold. Essentially, the market is responding rationally to a leaky monetary system by trying to create a new one.
This is Mises’ “flight to real value.” Since the CBs have shown great discipline in obeying their CPI indicator, which obviously has no direct influence on any financial market, the hyperinflationary spiral Mises’ phrase implies has not occurred and can’t. A hyperinflationary spiral (in which everyone flees to assets whose price will increase proportionally to monetary dilution) cannot avoid a CPI effect, so this brake is effective.
However, the CBs have yet to face a difficult choice: the stagflationary problem of whether to relax CPI targets, or visibly impose austerity. If the CPI targets are relaxed, the hard-asset speculators will become incredibly jazzed, and it will be very difficult to regain the credibility needed to stop the slide. But it is not clear to me that the CBs have much tolerance for austerity to begin with.
But the guys at the Fed are incredibly smart, and no doubt they will solve the problem as they have in the past. This is the art of central banking - creating temporary crises in which the price of your currency increases relative to other assets, to break the speculators who would otherwise drive it to zero in five seconds with the use of infinite leverage. It’s a stupid and pointless game, but it won’t stop any time soon.
Ultimately, the entire practice of printing money to purchase or guarantee financial instruments - public or private, foreign or domestic, short-term or long-term, is an appalling abuse of power. It is a leftover from the century of socialist mercantilism. And if the citizens of the world ever figure out that the authorities who pretend to be curing the business cycle are in fact in the business of causing it, I wouldn’t want to be anywhere near Washington DC.
“…Murray said his Global Financials Hedge fund had removed most of its long and short positions and had built up cash… “We’ve effectively shut the thing down, we don’t like what’s going on … In 25 years I’ve never seen volatility like this,”…He said his funds have no exposure to investment banks or banks with capital market activities, and instead favour retail banks in Russia and Poland, which he believes will be less affected by the subprime fallout. “The real risks of the banks are the pipelines… In particular they’ve been providing bridging loans which they pass on to other banks, but other banks don’t want to take them…” http://investing.reuters.co.uk/news/articleinvesting.aspx?rpc=401&type=hedgeFundsNews&storyid=2007-08-13T071316Z_01_NOA325961_RTRUKOC_0_BLUEPLANET-HEDGE.xml
“…Mr. Chan said this predilection for lemming-style buying or selling from investors using similar computer models could turn what would normally be a market setback into a wider contagion. “If all the models say buy, who is going to say sell? There is just not enough money on the other side,” he said. …the club of quantitative investors is a small, exclusive one that bridges the trading desks of investment banks and some of the country’s largest hedge funds. One might call it six degrees of quantitative investing…” http://www.nytimes.com/2007/08/13/business/13hedge.html?_r=1&ref=business&oref=slogin
moldbug says, “Central banks do not have the political power to orchestrate sustained “recessions.”
Did you forget about Paul Volcker? He flipped the interest switch just as Carter was running for re-election. I’d call that political power.
“…Yukos receiver Eduard Rebgun has set the starting price for Netherlands-based Yukos International U.K. at $300 million. Apart from the Slovak stake, the unit also has at least $1.5 billion cash on its accounts. Rebgun has said the low starting price reflected the assets’ risks… The planned sale is contested by the management of the unit, which says Dutch law might not recognize the sale because the assets are beyond Russian jurisdiction…” http://www.moscowtimes.ru/stories/2007/08/14/045.html
“The Central Bank is unlikely to allow the ruble to appreciate further in 2007 because it wants to shield domestic industries from the strong currency’s negative impact… he did not rule out the ruble weakening against the basket in the medium term…” http://www.moscowtimes.ru/stories/2007/08/14/044.html
black swan,
I said “have,” not “had.” Volcker had that power, sure. After what was it, seven years of miscellaneous hell, “Whip Inflation Now,” etc, etc? Politics is a moving target.
The CBs do not have the political power to impose a sustained recession now, because they are not capable of explaining why they need to do so. Since their policies are the cause of the problem, they cannot repudiate these policies without losing the very credibility they would need to pill the cat.