Can Russia Blow Its $530B Reserve Stash?

♠ Posted by Emmanuel in , at 10/21/2008 11:04:00 AM
I am one of those who thought that the reserve accumulation of LDCs in recent years has been a huge opportunity cost. If nothing else, the current crisis is making me reassess that view as LDCs are being whacked hard by the credit crunch. Nobody is getting away scotch-free this time around. In addition to what South Korea has spent propping up its financial sector, it now has chipped in another $3.8 billion to safeguard its construction sector. With regard to South Korea, it already boggles me that we're asking if its $235B in reserves (6th largest in the world) are "enough." What more can I say about Russia, then, with its $530B stash (3rd largest in the world)? In less than a quarter, it has already gone through a tenth of its reserves because of forex intervention to stabilize the ruble and measures to prop up an ailing banking system. Like with Mexico, Russia fears its reserve burn rate is unsustainable even given its humongous size:
Russia must use caution in deploying its foreign exchange reserves to battle the effects of the global economic crisis, after spending nearly a tenth of its total in two months, Finance Minister said on Tuesday.

The reserves, the world's third largest, are now at $530.6 billion, down $66.9 billion since early August. The rating agencies have said Russia's reserves are a key factor for the country's investment grade rating,

The call on the cash pile is rising because the country has to support its currency, fund high budget social spending and finance a $210 billion financial system rescue plan, a challenging task at a time of declining oil prices.

"The gold and forex reserves have fallen by $50 billion," Finance Minister Alexei Kudrin told fellow finance ministers from former Soviet states. "We need to be careful when we use this stabilizing influence. Gold and forex reserves allow us to guarantee the currency rate stability," he added. Reserves have fallen mostly because of heavy interventions by the central bank over the past months. The regulator has managed to keep the currency stable versus the dollar/euro basket at around 30.40.

But as ordinary Russians track their savings through the dollar rate officials have to intervene almost daily to persuade the population that the rouble will not weaken. "No rouble devaluation is planned," Kudrin's deputy Sergei Shatalov told reporters in the Armenian capital of Yerevan, where he was traveling as part of President Dmitry Medvedev's delegation.

As the dollar continued its rally versus the euro on global markets, its rate versus the rouble rose to the highest level since February 2007 of 26.5 while exchanges rates on the streets were as high as 28. Traders said, however, they haven't seen signs of central bank's interventions in the past two days.

The reserves are poised to fall by a total of $74 billion in the next weeks. Russia has earmarked $50 billion to help its companies refinance foreign loans, another $6.7 billion to buy local stocks and $17.3 billion in subordinated loans for the country's largest banks.

The money will mainly flow via state agent, Development Bank, known in Russian as VEB, whose head said on Tuesday he had already received $97 billion in refinancing applications. Russian companies have borrowed aggressively abroad to fund growth and acquisitions in the past years and now struggle to refinance loans as capital markets are shut.

"Banks have applied for twice as much as companies -- $64 billion from the banks and $33 billion from companies," Vladimir Dmitriyev told reporters adding that the first 10 applications would be cleared in the near future. He also said the bank may start investing state funds in the stock market this week.

Kudrin said the Finance Ministry will withdraw from refinancing banks, leaving that role to the central bank's new system of collateral free loan auctions, which began on Monday.
As an aside for my fellow migration watchers, the Reuters article concludes with Russia warning that its slowdown is going to dent the earnings of migrant workers of those from the CIS. It is not commonly known that Russia is the world's second largest migration destination after the US, although (I hope) IPE Zone readers are better informed than most:
[Kudrin] also told finance chiefs of the Commonwealth of Independent States (CIS), a loose grouping of ex-Soviet republics, that they would be affected by a slowdown in Russia's construction industry, which employs migrants from all over the region. "The industry is overheated and will suffer a decline in demand and many who only just started their projects feel it already," Kudrin said.