Dependance on raw materials can be the first step!
Russia is selling dollar bonds for the first time since the government defaulted on $40 billion of domestic debt in 1998. The five-year notes yield 125 basis points over similar-maturity U.S. Treasuries and the 10-year bonds have a 135 basis-point spread.
The sale is the second-biggest public dollar debt offering in emerging markets on record, after Qatar sold $7 billion of five-year, 10-year and 30-year bonds in November, Bloomberg data show.
The yield on Russia’s 11 percent dollar note due July 2018 has dropped 77 basis points to 4.489 percent this year, according to prices by Renaissance Capital. The nation’s debt is rated BBB by Standard & Poor’s, two levels above non-investment grade, and one step higher at Baa1 by Moody’s Investors Service. (via Russia, Egypt Return to Bond Markets for $7 Billion Update3 – BusinessWeek).
The Russian conundrum
After decades of boycott, machinations and confrontation, the Russian Government is in a strong position of being low on debt. With the lowest levels of Government and private (household) debt, it is the Russian corporate sector that is the main debtor. With debt levels ranging between 2%-20%, Russia is in a league of its own.
At the start of the Great Recession, the Russian industrial and corporate systems were on the verge of bankruptcy. Russian industry with hugely in debts to Western banks, payable in the next 12 months, were in difficulties, refinancing these debts. Defending the Russian rouble, riding the treacherous waves of the The Great Recession, Russian foreign exchange reserves went down from nearly US$400 billion to US$275 billion.
Without depositors panicking about Russian banks.
Russian crisis and default are ‘artificial’ and opportunistic creations of Western bankers, trying to squeeze a recalcitrant country. Russia managed the “budget deficit to hit 6.8% of GDP this year and wants to lower that to around 3% by 2012.” G7 and OECD countries have created a club for themselves, by giving each other unlimited line of credit – while the developing world gets credit based on fast-depreciating dollar/euro foreign exchange reserves.
Maybe this needs an inversion.
As demand and prices crashed … so did Russian economy!
Russia’s Achilles’ heel
Russia is too dependent on high raw material prices. High prices result from hot demand from the world economy. Russia feeds on high growth rates – but cannot be the reason for growth of the global economy.
What happens to Russia if a ‘new’ Caribbean Republic (Cuba, Haiti, West Indies, etc) were to start drilling for oil? In 5 years, the world would be awash with oil – and Russia’s mineral earnings could evaporate.
The Russian economy remains structurally weaker than widely perceived. High oil prices of the last 5 years built up foreign exchange reserves – as did inflows in the Russians stock market. Russian entrepreneurs remain an endangered species.
Large swathes of Russian enterprise have reverted back to the state – albeit in a corporate form, in the hands of oligarchs, a proxy for the State . The world has not yet forgotten the Russian debt default. Russia has come out from a default about a decade ago – with a nearly US$400 billion reserves – flexing its muscles in Georgia and dependent on a high oil prices.
Russia should get off its high military horse. Instead Putin-Medvedev should build alliances, sign agreements within the BRICS framework and rebuild the Russian system.
Heads you lose, tails I win
Russia’s mineral resources map – (Courtesy – Der Spiegel)
Like Quicktake has pointed out in earlier posts, the US has alternated between an overvalued currency to gain ownership over large sections of world economy – and now with a devalued dollar, it seeks to gain an upper hand in merchandise exports. The three main points that one needs to understand are: -
One – It reduces the real value of US debt. The Chinese, the Rest of BRICS and the Others need to be paid a lot less in the future. (as pointed out earlier in various posts linked here.) Two – It makes US exports artificially competitive. (as pointed out earlier in linked posts). Three – US competitiveness will be anchored to assets purchased with over-valued dollars.
What the US is now proposing is that the Chinese Yuan must become ‘stronger’ – and the dollar must become weaker. This will mean a real reduction in US debt – and a subsidy for US exports. Of course, a devaluation has never helped any regime in the long run – but in the short run it reduces imports and increases exports. But is a ‘fix’ that the patient begins to become dependent on!
Is that the US is wanting to do to itself?