Why bad news for the ruble could spell disaster for the dollar

[webfact]

OVERDRIVE
Why bad news for the ruble could spell disaster for the dollar
Thanong Khanthong

BANGKOK: -- Has the ruble fallen off a cliff and brought the Russian economy to its knees? Most mainstream analysts appear to think so, particularly after Russia's central bank was forced to hike its rate massively from 10.50 to 17.0 per cent to defend its currency.

They all agree that at this critical juncture of the financial war, there is no way that Russia can turn things around. The size of the US's GDP is $17 trillion. The EU's GDP is $18 trillion. That makes a combined total of $30 trillion, which dwarfs Russia's $2-trillion economy 15 times over. In short, the US and the European Union are too strong for Russia to resist - financially, economically and militarily.

But is this really the case?

The Russians have maintained that any sanctions against them would boomerang on the West. By imposing economic and financial sanctions, the EU was damaging itself more than Russia. Two-way trade between Russia and the EU amounts to more than $400 billion annually.

The EU has been suffering a deep recession since the 2009 crisis. Recovery is nowhere in sight. By waging an economic and financial war against Russia, the EU is engaging in a futile exercise. This is because Russia has a way out - by trading with China and the other emerging market economies. China has an economy that is now larger than that of the US in terms of purchasing power parity. China's $17-trillion economy can easily absorb Russia's $2-trillion economy. Russia can buy cheap Chinese goods in rubles. It does not need to accumulate dollar reserves for international trade. At the same time, China can buy Russia's energy with its yuan. By doing so, both Russia and China are engaging in a "de-dollarisation" process, trading with each other in local currencies without having to rely on the US currency.

The dollar will suffer from this alliance of Russia and China, which has become a marriage of necessity.

In the immediate term, Russia's financial system is facing a severe crunch brought about by capital outflow and the attack on the ruble. Russia's reserves are still high at $420 billion to cushion the ruble fall. Moscow is prepared to dig further into its reserves to defend its currency. But if it really runs out of short-term foreign funding in the face of the ongoing financial squeeze, it can turn to China for liquidity.

In October, Russia and China signed a bilateral currency-swap agreement amounting to $25 billion, or 150 billion yuan. The deal allows the central bank of Russia to borrow yuan in times of liquidity crisis, and vice versa for the central bank of China. The South China Morning Post has just reported that there is a possibility of Russia turning to this financial facility to cushion the ruble's fall.

If Russia actually taps the yuan as part of the swap agreement, it will mark China's emerging role in providing bailouts, and also lend credit to the yuan as a currency to be reckoned with. In addition, it will signal to other emerging market countries that there is an alternative to the global structure of dollar liquidity governed by the US Federal Reserve and the IMF/World Bank. Crisis-hit countries would be given the choice of borrowing from China, which has reserves of $4 trillion, rather than from the IMF, with stringent conditions attached. If Russia activates the swap agreement, it will mark a point of no return for the global financial system.

Source: http://www.nationmultimedia.com/opinion/Why-bad-news-for-the-ruble-could-spell-disaster-fo-30250180.html


-- The Nation 2014-12-19

[puukao]

Disaster for the US dollar? ah, very doubtful. maybe if oil was denominated in Euros, or if the US couldn't manipulate markets like a boss.....but this is a game that Russia, Venezuela, Japan, and maybe China will lose in the short-run. In the "long-run" Of Course everything will play out..... QE will stop in USA, rates to 10% from zero, dollar crushed, market falling, etc.....but this is not a scenario that will happen in 2015. Exposure to Russia is pretty small from US Banks anyhow....people look at a map, think Relative risk, and put it into America. Regardless of all the scamming going on there.....it's all relative.

[F430murci]

This is the same idiot that wrote "American is Stretched to Breaking Point, Watch the Markets."

He says US GDP of 17 tr + EU GDP of 18 tr equals 30 tr. Huh??? 17 + 18 = 30. He cannot even add and we are supposed to take him seriously on financial matters.

He says Russia's foreign reserve of $415 bn can absorb . . . Russia foreign reserve is down to about $ 370 bn of which about $ 160 bn is NOT liquid. That leaves about $210 bn liquid to deal with crisis and losses of $40 bn for every $10 per barrel decrease in oil price below a $100 a barrel.

Russia will likely have to spend another $ 70 bn in very short term to try and further prop up Ruble. This would leave about $ 140 bn in liquid foreign reserve by the first of the year with losses to the federal bydget of somewhere between $100 to $160 bn due to decrease in oil price alone. He now has bigger problems paying debt due to currency losses

He says Ruble devalued due to attack on the Ruble. Russian already had inflation and recession prior to sanctiins. Putin devalued Ruble to try and offset decrease in oil price because he does not have enough liquid reserves to make up the deficiencies federal budget. He effectively threw Russia into hyperinflation to try and avoid default. No one attacked the Ruble.

Edited December 19, 2014 by F430murci

[F430murci]

More in Russia reserves only to show this writer for Nation is completely lost/clueless.

-------

"About $170 billion of its assets sit in two big wealth funds, the Reserve Fund (worth about $89 billion) and the National Wealth Fund (worth about $82 billion). But much of what is in these funds could prove inaccessible if called on to meet short-term financing needs."

. . .

In this context, Russia hasn't burned through $100 billion out of $500 billion in reserves in the last year, but about $100 billion of $300 billion liquid reserves.

According to Bloomberg, "the Bank of Russia will probably spend another $70 billion to defend the ruble" as it continuet to slide. That would leave the country with just over $100 billion left.

http://www.businessinsider.com/problem-with-russias-foreign-reserves-2014-12

[SiSePuede419]

America can make it's own "wodka", thank you very much.

And caviar? While American caviar from Shovelnose sturgeon is not as good as the Russian version, it's a hell of a lot more affordable.

What's left that Russia has that we need? Hackers? Blonde prostitutes? Check. Check.

Russia could disappear from the planet tomorrow and few Americans would even notice, 555.

[blazes]

Russia has nuclear weapons.

[blazes]

European banks exposed to Russia could find themselves in trouble if Russian companies decide to default on bank loans. Banks in France and Austria are particularly badly exposed.

It's a game of dominos, eventually.

[BernieOnTour]

America can make it's own "wodka", thank you very much.

And caviar? While American caviar from Shovelnose sturgeon is not as good as the Russian version, it's a hell of a lot more affordable.

What's left that Russia has that we need? Hackers? Blonde prostitutes? Check. Check.

Russia could disappear from the planet tomorrow and few Americans would even notice, 555.

Right.

But a lot of Europeans might feel the heat. Eg. >30% of Germany's gas consumption is imported from Russia. Same holds true for a lot of the Oil refineries - and nowadays those are fine tuned to a certain crude oil composition, so a change of supply is difficult.

Similar, as Europe was severely affected by the US mortgage crisis and Lehman Brothers collapse, a crisis in Europe would most likely affect the USA.

Edited December 19, 2014 by BernieOnTour

[ToddinChonburi]

If you watched any of the winter Olympics they showed how far behind Russia really is . They interviewed a women that stated the games brought this area ahead thirty years.

Putin is killing Russia, Cuba is now buttering up to the US because of it.

Communism and socialism will not work.

[Berkshire]

This doesn't make sense. China has trillions in US$ reserves. If the US$ crashes, China will pay big. China is not stupid.

[bitcoinbob]

this writer does not have a clue how markets work. yes the Russian have just turned on there 25 billion swap agreement with China and are asking for a much bigger line , China is learning the hard way what it is like to be a reserve currency . if they get in bed with the Russians it will cost them a ton of there reserves.the Russian govenment does not have a lot of debt it is there oil companies in dollar debt, one gas company alone has 25 billion coming due in dollar debt this month. the chinese have already cut off Venezuela they loaned them 35 billion down that sinking oil producer rat hole. Saudis are cleaning house killing off all there competition , even Norway and the British are feeling it now. Chinese are next with ist hugh oil companies that have dollar based debt. lower oil prices and strong dollar all oil companies in deep trouble= no exploration, massive layoffs=less competition higher price in about 2 to 3 years. No alternative fuels innovations prefect world for the Arabs

[Utley]

"Crisis-hit countries would be given the choice of borrowing from China, which has reserves of $4 trillion, rather than from the IMF, with stringent conditions attached."

There is a very good reason for those "stringent conditions"; the IMF and World Bank want to eventually be repaid. The money is a "loan", not a "gift".

[topt]

this writer does not have a clue how markets work. yes the Russian have just turned on there 25 billion swap agreement with China and are asking for a much bigger line , China is learning the hard way what it is like to be a reserve currency . if they get in bed with the Russians it will cost them a ton of there reserves.the Russian govenment does not have a lot of debt it is there oil companies in dollar debt, one gas company alone has 25 billion coming due in dollar debt this month. the chinese have already cut off Venezuela they loaned them 35 billion down that sinking oil producer rat hole. Saudis are cleaning house killing off all there competition , even Norway and the British are feeling it now. Chinese are next with ist hugh oil companies that have dollar based debt. lower oil prices and strong dollar all oil companies in deep trouble= no exploration, massive layoffs=less competition higher price in about 2 to 3 years. No alternative fuels innovations prefect world for the Arabs

See highlight - is that before or after they lent them another $4 billion a couple of weeks ago which they added to their reserves?

http://finance.yahoo.com/news/venezuela-uses-4-billion-china-012900653.html

[Robert24]

I don't understand why the Ruble/Yuan swap agreement should be bad for the dollar. The Chinese are trying to become step by step more independent from the US$ with such bilateral currency swap agreements.

But this will not impact the $ negatively. To the contrary the $ will strengthen significantly over the next 1-2 years and will stay the world reserve currency for a while. Maybe in 20-30 years the Yuan may replace the $ as the main Global currency but not in the foreseeable future.

I agree with F430murci that the author of this article, Mr Thanong Khantong has probably little clue about world financial markets and matters of economy.

[Krataiboy]

The US clearly believes it is killing two birds with one stone - further undermining the Russian economy in the hope of ousting Putin, while increasing the ailing Eurobanks' reliance on the Fed.

They have yet to learn the lessons of Pearl Harbour and Leningrad. Like the Japanese, the Russians will not accept death by economic strangulation and will go down fighting - literally if necessary.

The wings of the Pentagon hawks dictating US foreign policy need to be clipped and jaw-jaw substituted for the war drums beating on both sides of the geopolitical divide.

[bitcoinbob]

another 4 billion or more down for china , they can go through a lot of money trying to keep these guys afloat . as the Russians learned they were spending 8 billion a day to support the ruble till they finally stopped 460 billion in reserves go fast at 8 billion a day. Chinese are in a similar situation as the Russians no Government debt but trillions in 14.2 trillion in corporate debt petrochina outstanding debt is 300 billion backed by Chinese government all based in dollars, that is why china is trying to drive the yuan to get stronger. think about all the other govt backed corps and your talking trillions in corp debt the chinese govt is backstopping. interesting that ALIBABA did there IPO in the U.S. and the timing as now. seems to me that IPO was done in the U.S. because Chinese investors are already <deleted> in local market and ALIBABA IPO would have sent there market into a tailspin and timing is now because they know golden goose China is coming to an end.

[diehard60]

"He says US GDP of 17 tr + EU GDP of 18 tr equals 30 tr. Huh??? 17 + 18 = 30. He cannot even add."

If this is how this so called reporter reports the news how can anyone beleive him?????????

[mopar71]

Saudis are cleaning house killing off all there competition , even Norway and the British are feeling it now. Chinese are next with ist hugh oil companies that have dollar based debt. lower oil prices and strong dollar all oil companies in deep trouble= no exploration, massive layoffs=less competition higher price in about 2 to 3 years. No alternative fuels innovations prefect world for the Arabs

I agree. Some people like to say "Obama and the Saudis are working together to punish Russia!" but your statement above makes much more sense. Russia isn't being punished, they just happen to be in the way. In addition to killing off traditional competition, I read that they also want oil to go low enough to kill off the fracking companies in the USA. The Saudis - like other countries that don't have to worry about elections and regular changes in leadership - can think longer term than most.

[craigt3365]

I can't find it now, but just read a great article on the impact of the Ruble crash globally. Something like Russia only accounts for 3% of world economic output, and much less in terms of global trade. They said some countries and companies are going to get hurt. Carlsberg, VW, Baltic states, Moldova, etc. And some banks with ties to Russia. But otherwise, the impact overall to the world will be small.

I also saw a very interesting chart showing the decline of the price of oil as contrasted to the Ruble. Almost in lock step down....

Another very interesting article about IKEA pulling out. I guess they can't adjust the prices quick enough! Crazy times.

[mania]

This is the same idiot that wrote "American is Stretched to Breaking Point, Watch the Markets."

He says US GDP of 17 tr + EU GDP of 18 tr equals 30 tr. Huh??? 17 + 18 = 30. He cannot even add and we are supposed to take him seriously on financial matters.

"He says US GDP of 17 tr + EU GDP of 18 tr equals 30 tr. Huh??? 17 + 18 = 30. He cannot even add."

If this is how this so called reporter reports the news how can anyone beleive him?????????

Well before you write him off as an idiot could be he is quoting two countries GDP & likely currencies yes?

To get one answer he would need to convert one

Seems he converted it all to Euro's in which case 30 is roughly (31.6 @ today rates) correct

Then again he did use a $ sign which would be incorrect but hey.... That is what proof readers are for.

Edited December 19, 2014 by mania

[NeverSure]

Saudis are cleaning house killing off all there competition , even Norway and the British are feeling it now. Chinese are next with ist hugh oil companies that have dollar based debt. lower oil prices and strong dollar all oil companies in deep trouble= no exploration, massive layoffs=less competition higher price in about 2 to 3 years. No alternative fuels innovations prefect world for the Arabs

I agree. Some people like to say "Obama and the Saudis are working together to punish Russia!" but your statement above makes much more sense. Russia isn't being punished, they just happen to be in the way. In addition to killing off traditional competition, I read that they also want oil to go low enough to kill off the fracking companies in the USA. The Saudis - like other countries that don't have to worry about elections and regular changes in leadership - can think longer term than most.

In Saudi and Russia, the government owns the means of production. In the USA private capital owns the means of production.

Saudi and Russia use oil money to feed their people. The USA companies use oil money to feed their investors' pocketbooks.

A low price of oil and oil products is popular with the voters in the USA. In Saudi and Russia the price of oil is critical to the engine of government. Saudis and Russia need about $100 oil to feed their people and maintain their government. US producers need about $55 oil to break even.

It really doesn't matter "why" this is happening so I won't debate it. What matters is "what" it does to Russia and Saudi governments as opposed to what it does to a capitalist engine which doesn't belong to the US government.

Now, people who have digested this have a grasp of the difference in effects to the government players.

[craigt3365]

Very interesting article:

http://www.bbc.com/news/magazine-30539355

The Kremlin has known, ever since the oil boom took off 10 years ago, that a political system was being built on the basis of the one thing in Russia that Vladimir Putin could not control - the price of oil. The Kremlin's own accounts estimate that sales of oil and gas accounted for 50% of Russia's federal budget revenue in 2013. And ominously, roughly half the Russian population lives off the state budget - either as state employees, pensioners or as benefit claimants.

[Robert24]

@Neversure: I think you should look at the bigger picture in the US. The shale oil boom was one of the drivers of the US economy, especially when it comes to employment of low skilled workers. Have a look a the state of texas for example. If many of the shale oil companies go out of business and also the correlating supply chain companies, it will hurt this sector of the US economy quite badly. Agree on the opposite side there will be consumers that have more money because gas is cheaper, but there will be less jobs as well. So this isn't just about rich investors that get hurt, it will hurt many employees as well who may loose their job.

Now with regards to Saudi Arabia, believe me they don't need 100$ oil to survive. Their break even costs are very very low, they can make substantial profits at 40$ oil because of their low costs. Now obviously revenues will go down but they still can produce, they can even increase production to increase revenues. Whereas at current level of oil prices, shale oil producers loose money and if those low prices will stay, they will go out of business.

Similar situation in Russia, their costs to produce oil and gas are very low, they get hurt because revenues for the governments go down considerably, but they still get revenues. When it comes to Russia, you should worry more about corporate debt in US$. Many corporates in Russia are highly leveraged in foreign currency. So the risk might be that the government may have to bail out some corporates or even banks and so people should be worried about the contagion risk related to that rather than the reduction of revenue for the government from lower oil prices.

[lil fluffy clouds]

This doesn't make sense. China has trillions in US$ reserves. If the US$ crashes, China will pay big. China is not stupid.

It's all interconnected, every economy influences the whole, why waste 98% of ones energy in competition. Could put it to much better use.

[zydeco]

@Neversure: I think you should look at the bigger picture in the US. The shale oil boom was one of the drivers of the US economy, especially when it comes to employment of low skilled workers. Have a look a the state of texas for example. If many of the shale oil companies go out of business and also the correlating supply chain companies, it will hurt this sector of the US economy quite badly. Agree on the opposite side there will be consumers that have more money because gas is cheaper, but there will be less jobs as well. So this isn't just about rich investors that get hurt, it will hurt many employees as well who may loose their job.

Now with regards to Saudi Arabia, believe me they don't need 100$ oil to survive. Their break even costs are very very low, they can make substantial profits at 40$ oil because of their low costs. Now obviously revenues will go down but they still can produce, they can even increase production to increase revenues. Whereas at current level of oil prices, shale oil producers loose money and if those low prices will stay, they will go out of business.

Similar situation in Russia, their costs to produce oil and gas are very low, they get hurt because revenues for the governments go down considerably, but they still get revenues. When it comes to Russia, you should worry more about corporate debt in US$. Many corporates in Russia are highly leveraged in foreign currency. So the risk might be that the government may have to bail out some corporates or even banks and so people should be worried about the contagion risk related to that rather than the reduction of revenue for the government from lower oil prices.

It may be time to take a look at some of these new energy producing techniques. In North Texas, earthquakes now rumble through the region on a regular basis. I grew up there. Until when this latest energy boom started, I had never heard of an earthquake in North Texas. In my imagination, sometimes I see the oil and gas industry excavating the world's largest sinkhole in the Dallas-Ft Worth area, with all of it due to collapse and create a new Great Lake.

[mania]

It may be time to take a look at some of these new energy producing techniques. In North Texas, earthquakes now rumble through the region on a regular basis. I grew up there. Until when this latest energy boom started, I had never heard of an earthquake in North Texas. In my imagination, sometimes I see the oil and gas industry excavating the world's largest sinkhole in the Dallas-Ft Worth area, with all of it due to collapse and create a new Great Lake.

Funny you mention that as I once had someone from the business describe something very similar.

But his greater concerns were the off shore wells.

[Berkshire]

Very interesting article:

http://www.bbc.com/news/magazine-30539355

The Kremlin has known, ever since the oil boom took off 10 years ago, that a political system was being built on the basis of the one thing in Russia that Vladimir Putin could not control - the price of oil. The Kremlin's own accounts estimate that sales of oil and gas accounted for 50% of Russia's federal budget revenue in 2013. And ominously, roughly half the Russian population lives off the state budget - either as state employees, pensioners or as benefit claimants.

That is an interesting article. I doubt there is a US/Saudi conspiracy, but if there was one, it's rather ingenious. It may solve a "Putin problem" that no amount of diplomacy ever could.

[Asiantravel]

It may be time to take a look at some of these new energy producing techniques. In North Texas, earthquakes now rumble through the region on a regular basis. I grew up there. Until when this latest energy boom started, I had never heard of an earthquake in North Texas. In my imagination, sometimes I see the oil and gas industry excavating the world's largest sinkhole in the Dallas-Ft Worth area, with all of it due to collapse and create a new Great Lake.

the potential damage to drinking water is also scary

http://www.cleanwateraction.org/page/fracking-dangers

[me313]

Disaster for the US dollar? ah, very doubtful. maybe if oil was denominated in Euros, or if the US couldn't manipulate markets like a boss.....but this is a game that Russia, Venezuela, Japan, and maybe China will lose in the short-run. In the "long-run" Of Course everything will play out..... QE will stop in USA, rates to 10% from zero, dollar crushed, market falling, etc.....but this is not a scenario that will happen in 2015. Exposure to Russia is pretty small from US Banks anyhow....people look at a map, think Relative risk, and put it into America. Regardless of all the scamming going on there.....it's all relative.

The article ends with commentary on the rise of the Chinese grip on money markets. China owns a significant portion of the US debt, has many holdings in the economy, so much so that if China suddenly pulled out of it's investments in some sort of financial attack, the dollar would crash. The question would be whether the dollar could rebound or permanently lose it's significance in the world money markets. The situation is unstable and the Yuan is a contender not to be taken lightly. Many people question whether the US dollar will hold it's top position in money markets in the decades to come, even in American news broadcasts commentators and economists say there is a danger of the Yuan or other currencies taking over what used to be called "Dollarization".

Edited December 19, 2014 by me313

[Baghdad]

Lets keep in mind that China financial own's the USA