Russia’s Reserve Scam

Over the past few days people have been discussing President Putin’s error when discussing the so-called “reserves” that Russia has. In an interview with the German publication Bild the President claimed that Russia had about $450 billion in reserves. This is a categorically false statement.

To clarify, when speaking of Russia’s “reserves” there are three different funds that are being referred to. First, the Sovereign Wealth Fund held by the Finance Ministry. According to the Finance Ministry’s own numbers, the SWF now holds $49.95 billion. The Finance Ministry also holds a second reserve fund called the National Welfare Fund. This fund allegedly has $71.72 billion left in it, but according to Russian economist Sergei Aleksashenko, the true number is $48.1 billion, as the remainder has already been distributed.

And finally there is the Russian Central Bank’s so-called “international reserves”. The Central Bank posts these numbers every Thursday, and gives a small breakdown of the numbers at the end of every month. But as I blogged here nearly a year ago, the Central Bank is fudging their numbers. To give a brief summary: the Central Bank is including within its “international reserves” the two reserve funds held by the Finance Ministry (now slightly less than $100 billion total), its gold (the Central Bank claims to have $48.5 billion), and (from what I understand, though it is not laid out in the Central Bank’s accounting as it is considered a state secret) palladium reserves. The latter two items are not “liquid” assets, and it is a questionable practice to include them. Thus, when the Central Bank says that it has $368 billion in “reserves”, this is an untrue statement. If you take away the gold, and the two reserve funds, the Central Bank has less than $200 billon, but I suspect it is quite a bit lower than that.

Now, as for the other question that has come up in regards to all of this. As the price of oil has plunged to record lows, the exchange rate of the ruble to the US dollar has more than halved. Where it was maintaining a steady rate of about 28 rubles to the dollar before the war in Ukraine began nearly two years ago, it has now dropped to 78 to the dollar. Experts have said that this is still too high, and that the natural rate is closer to the 90s. The head of one of Russia’s own state-run corporations conceded publicly a month ago that the rate should be closer to 80 (when the ruble was sitting at about 72 to the USD).

So how is the Central Bank keeping the ruble so unnaturally stable? They claim that they have not intervened on the market since July. However, there are other ways to prop up the ruble that do not include officially intervening. One of those was highlighted by the Russian economist Sergei Guriev in December:

“The Russian government, especially the Central Bank, has largely managed to preserve financial stability, a brief outbreak of panic in December 2014 notwithstanding. To offset the loss of access to Western financial markets, the Central Bank has relied on a new instrument—foreign currency repurchase agreements. In effect, the Central Bank has lent dollars to Russian banks that essentially posted their own dollar loans to Russian companies as collateral—and in turn used the dollars to repay their external debt. This has allowed Russia to stave off a run on the ruble as well as major defaults on Russian corporates’ dollar-denominated debt.”

This is one way of intervening on the currency market without officially “intervening”. How much longer the Russian Central Bank can keep up this pretense remains to be seen.

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