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Russia's Ruble Crisis

Speakers: Willem H. Buiter, Adjunct Senior Fellow, Council on Foreign Relations; Global Chief Economist, Citigroup, and Stephen Sestanovich, George F. Kennan Senior Fellow for Russian and Eurasian Studies, Council on Foreign Relations
Presider: Michael A. Levi, David M. Rubenstein Senior Fellow for Energy and the Environment, Director of the Maurice R. Greenberg Center for Geoeconomic Studies, Council on Foreign Relations
December 19, 2014
Council on Foreign Relations

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LEVI: Good morning and welcome to this Council on Foreign Relations meeting on Russia's Ruble Crisis. My name is Michael Levi, I direct the Maurice R. Greenberg Center for Geoeconomic Studies here at the Council on Foreign Relations, and we have essentially a perfect geoeconomic storm here where economic forces, geopolitical forces, Russian domestic politics are colliding to create a rapidly changing situation and a fairly confusing one to sort through.

But we are in luck. We have two fine scholar practitioners who are fellows at the Council on Foreign Relations to help guide us through all of this.

Steve Sestanovich is the George F. Kennan Senior Fellow for Russian and Eurasian Studies here at the Council on Foreign Relations, and the Kathryn and Shelby Cullom Davis professor of international diplomacy at Columbia University. He is the author of "Maximalist: America in the World from Truman to Obama" published in February of this year. From 1997 to 2001 he served as special advisor to the secretary of state and ambassador at large for the newly independent states. In that capacity he was the state department's principal officer responsible for policy towards Russia and the other states of the former Soviet Union.

Willem Buiter is the global chief economist at Citigroup and the newest adjunct senior fellow here at the Council on Foreign Relations. Prior to joining Citigroup Willem spent six years as a professor at the London School of Economics. Prior to that he was chief economist and special counsul to the president of the European Bank for Reconstruction and Development. And before that an external member of the Monetary Policy Committee of the Bank of England.

So two excellent guides to help us through all this. I want to remind all of you that this call is on the record.

Willem, start us off with a quick recap of what's happened with Russia's currency over the last six months, and particularly over the last week.

BUITER: Well, if I may -- let me just go back slightly further than that during the (inaudible) revolution sort of started. You have some interest rates worth 5 and a half percent, they're now at 17. And oil brent was at $110, $115 or thereabouts. This morning it is around $60 a barrel. And the ruble was around 33, and this morning it is hovering around 60 to the dollar.

And this all has accelerated, really, since the price of oil started tanking that is since late November, early December. There was already some pressure on the ruble and on rates on Russian interest rates as a result of the sanctions imposed by the west on Russia, especially the financial sanctions that have bitten quite hard.

Now in March of this year rates were raised to 7 percent, then on October 31st they went up another 1 and a half percent, and of course the big jump came just on December. (inaudible) rates were high at 17 percent from 10.

This slide in the ruble and the weakening of the -- in the price of oil of which Russia depends crucially both for exports and to makes its public sector revenue numbers, Russia's break-even price so to speak for its budget. It's around $93, $94 a barrel. So over $60 a barrel. And euro oil is actually $2.00 or so below normally the benchmark which I've been referring to. Which means that Russia is in deep, deep fiscal trouble.

The notion that you sometimes hear from the uninformed that the weakening of the dollar -- sorry. The weakening of the ruble and the decline of price of oil offset each other.

As regards to budgetary impact, only correct if you look at the budget in rubles. If you look at the budget in dollars, or preferably in terms of real magnitudes, there's no doubt that the sharp increase in inflation which we can expect as a result of this halving (ph) of the external value of the ruble that this will put an enormous squeeze on Russian public spending.

So the result for Russia is full-fledged financial crisis by now, major strains at the interbank market. You just heard this morning that the Russian Duma that passed the bank recapitalization bill. And one day that puts the U.S. Congress to shame.

But their credit shortages. Rosneft had to be bailed out by the central bank when some of its debt, dollar debt was maturing. And there was no way to refinance this in the markets.

They have decided not to impose any capital for an exchange constraint at this point. So the response has been extremely orthodox, almost put the bank in sharp increase in interest rate, minimal interventions to support the currency.

Yes, their finance ministry has said they're going to spend 7 billion. A, that is peanuts. Russia's likely to lose at current rate more than 11 billion in a week. And if the run, the capital drain were to pick up without capital or foreign exchange constraints that number could be much higher.

Russia is at the moment sitting on around 14 billion worth of international reserves. It's a moderately useful buffer stock. As long as you recognize that only about 40 billion of that is actually liquid and available. It's better than nothing. But it is not a deep cushion.

Russia was set for recession in our projections when this -- even before the Ruble collapsed and the price of oil started to tank the way it has. It is set now undoubtedly for serious recession, 4 percent to 5 percent of GDP at least. I would say unless there's a magical reversal and of course a sharp increase in inflation.

So...

LEVI: Let me put you on that last piece. Because there's obviously an immediate impact that Russian consumers are seeing. You're seeing people flood to the stores to buy foreign goods.

BUITER: Yes.

LEVI: A lot of this is still to come. Give us a sense of how this unfolds for the average Russian economically over the next let's say two years.

Vladimir Putin has said we have -- that they expect two years of recession. How does this -- how does this unfold? Does it get progressively worse for the average Russian? Or are they going to see the full brunt of it right away?

BUITER: Well, in terms of prices. And if there's rationing shortages.

They'll feel the effect now pretty soon. You can't have a move from 33 rubles to 60 ruble to the dollar in a country that's as dependent for everyday consumer goods on imports.

Russia's a massive oil and gas exporter. But it imports a large chunk of the daily necessities and indeed the daily luxuries. The Russian consumer is now beginning to feel this in earnest.

The effects on economic activity, employment are going to be slower in coming. But I can assure you that interest rates at the central bank at 17 percent. And appropriately higher for private credit.

Corporate are going to have trouble getting working capital. Capital expenditure, fixed investment is going to be sharply curtailed.

And there'll be, you know by the middle of next year, a sharp increase in unemployment driven by a mixture of credit crunch, right. The credit shortages that they're already seeing, even with the bailout and recapitalization of the banking system by the central government and by the central bank.

This is going to be a quite swift descent into recession. And which could well be worse than anything we've seen for Russia since the 1998 crisis.

For the world as a whole it is a much less significant event.

LEVI: So, Steve?

SESTANOVICH: Yes?

LEVI: This doesn't sound like a wonderful situation for Vladimir Putin to be facing. Yet, you wrote a piece for the Wall Street Journal three days ago titled Three Things That Could Cheer Putin Up Amid the Ruble Crash.

How is he looking at this situation? Let's start with on the domestic front.

SESTANOVICH: Well, he addressed this in the -- in his annual Castro-like press conference yesterday, three-and-a-half hours. He was asked about the support, both from within the elites and within the population at large.

And he chose to focus on popular support. He said you know right now the Russian people are his strong source of support.

He didn't point out his high popularity ratings. But that -- it goes without saying. You know it's still in the 1980s.

And his attempt was to make this a national confrontation with the rest of the world that's picking on Russia. And he hopes that that will provide the kind of political balance that he needs to ride out this crisis.

A lot of -- an interesting question that was also asked of him in the press conference, Mike, was about a palace coup, literally those words.

Because a lot of speculation has been about whether there would be a kind of erosion of support or a real disenchantment with Putin among the business elite, among Kremlin insiders, people who suddenly think you know he's bumbled everything.

And he says on that, kind of warning that we don't -- first he had a joke. He said we can't have a palace coup because we don't have palaces. He also said to the elite, don't assume that you will be treated any better by the West.

The most important thing, his most important political message, though, was continuity. After a lot of speculation this week that there would be a change of prime ministers, a change in leadership at the central bank, some other clean -- housecleaning among his top advisers.

He gave a vote of confidence to all of the policies and the policymakers responsible for economic policy. He said you know he had a little question here and there about the pace of getting to -- dealing with particular problems. But he gave a boost to the leadership of the central bank.

He did not raise any suggestion that there would be a new prime minister. He is -- he is trying to ride this one out for now. And his chances are pretty good.

There's not an organized opposition that is clamoring, that is saying that Putin is discredited by what has happened. People are generally lying pretty low.

LEVI: So, Steve, Willem described the unfolding domestic impact that the Russian people have seen some of this but not all of it. And they may not quite appreciate what's to come.

Does that have the potential to change anything over the next year or so?

SESTANOVICH: Well, yes. I mean I would -- I'd pick up on one thing that Willem said, which was about the difficulty that companies and other businesses will have in operating.

The number that gets thrown around a lot is $700 billion in corporate debt to the -- that is international, that has to be paid, probably most of it in dollars or euros. And $100 billion plus next year. That debt has suddenly gotten just as much more expensive as the ruble has gotten cheaper.

So these are companies that are going to be coming to Putin and to the government, hat in hand, asking for bailouts. Rosneft is only the first of these.

The banks that had to be recapitalized are still going to be shaky, and they're going to be coming for bailouts, $10 billion here, $20 billion there, $30 billion there.

This is going to put a lot of pressure on the government. But it also is a source of power.

It means that Putin is in position to decide who survives and how comfortably. And he's got most of the business elite wanting his favor over the next year. Because he is going to be the source of support for big companies in trouble.

LEVI: Fascinating.

Steve, let me ask you one other question. We're talking about how this plays out at home for Vladimir Putin. How does it play out abroad?

We obviously have the Ukraine conflict driving sanctions that are at least exacerbating the impact of the oil price plunge on the ruble. Does he -- does Putin double down? Or does he look for an opportunity to reconcile?

SESTANOVICH: Yes.

He -- there's a lot of speculation before the press conference about whether he would be conciliatory on foreign policy or try to be constructive. And he tried to do -- I mean or whether he would be provocative or conciliatory. And he tried to do both.

I mean the kind of rhetoric, the nationalist, crazy rhetoric that Putin is known for was you know on full display yesterday. All the talk about foreign countries want to take the bear and rip out his teeth and claws.

And at the same time, on a practical issue, which is how to get a ceasefire in Ukraine, how to get mediation, he was relatively low key.

He even suggested that there were -- sometimes when the separatists in Ukraine were making trouble he gave a vote of confidence to President Poroshenko. He said we want to see some kind of accommodation there.

Over the past week Russian spokesmen have been a little more moderate in the kind of rhetoric that they use in talking about an end state in Ukraine. Does it have -- what kinds of power have to be ceded to the central government by the separatists?

That's all at -- a hint at least, of a more careful, less ambitious, less belligerent policy toward Ukraine and of course toward Europe because what the real audience that he's playing to are the European governments that he wants to get to rollback sanctions over the next six months or so.

LEVI: So, Willem, this is how Putin handles this if Russia remains in this situation. Is there any surprise development that could lessen the economic pressure on Russia, lessen the challenges that Putin is facing right now?

BUITER: Well, there're two developments, obviously, that have brought on this mess. If they reverse or get reversed they make a huge difference.

First, a deal is reached and implemented. Got to be implemented in Ukraine. Sanctions are off the financial crunch, which Steve described.

The latest data we have for -- by the middle of the year show that in the horizon of about a year 60 billion U.S. external debt has to be refinanced. And over two year [INAUDIBLE] 90 billion. That's the Russian reserves, just to get some order of magnitude.

So clearly if peace breaks out in the Ukraine [INAUDIBLE] good news. And then a pickup in the price of oil. Oil has gone down mainly I think initially for fundamental reason, right.

There's been an increase in global supply, some weakness in demand because of underperformance globally. [INAUDIBLE] mainly interest and supply driven by U.S. shale oil. And the failure of OPEC to get together and act like the cartel that you used to know and love.
If -- we're going to see some attrition, I think, among the highest cost U.S. shale producers. And a greater reduction in supply, but I think that will be rather minor.

The best hope for Putin is that core OPEC, basically the Gulf States, stand up and collectively announce that they're going to take a million barrels a day out of the market. And with the price then back at 80 or thereabouts, 80 a barrel, it's not quite a home drive. But I do feel a lot more comfortable.

There're other reasons why the oil price could pick up again. There could be supply interruptions due to the Libyan civil war finally reaching oil exports and oil production, or tightening of sanctions by the U.S. Congress on Iran.

This would interfere as debt, oil and gas exports. There are a number of things that could happen. But these are all possibilities, not things that we can expect with any degree of confidence.

Also it's experienced worse. I mean there's nothing at the moment that puts the floor under the price of oil other than faith and a belief that at some point Saudis and the Gulf States will restrict supply.

If the oil price tanks another 10 or goes down to 40 temporarily, that would make things significantly harder. And that is just as likely at this point as an imminent rebound to 80.

We still expect I think that by the end of the year there will be sufficient supply restriction for the oil price to be close to 70 than to 50. So that is moderate good news.

LEVI: Last question to Steve before we open it up to everyone for their questions. So get your questions ready.

Steve, Russia's under considerably more economic pressure than they were even a few months ago. Is there anything that the U.S. government should be doing to take advantage of the changed circumstances?

SESTANOVICH: Well, the most important issue here is whether you can keep a coherent policy between the United States and Europe. This crisis has been handled you know all-in-all in a pretty effective way by the U.S. and the Europeans, building sanctions not always in lockstep, but in the same direction and without any significant unraveling in response to Putin's efforts to try to sew some kind of disunity among the major players.

If the -- that has got to continue. It is obviously Putin's biggest hope that there will be an unraveling and that as the renewal of sanctions comes due these sanctions have to be renewed annually. That means a first bunch in the spring and then in the summer.

If the -- if there's no consensus within the E.U., or disagreement between the U.S. and the E.U. about how to handle this, then leverage on Putin to produce a satisfactory outcome in Ukraine will be much less.

That's the key requirement, I would say, without -- if the U.S. doesn't meet that one then this could end much worse than we are now hoping.

LEVI: Excellent. So we've got a great start to this conversation, a lot more to dive into. Operator, can we go to questions, please?

OPERATOR: Yes, sir. At this time we will open the floor for questions.

If you would like to ask a question, please press the star key followed by your one key on your touchtone phone now. Questions will be taken in the order in which they are received.

If at any time you would like to remove yourself from the questioning queue just press star, two. Again, to ask a question press star, one.

And our first question comes from Andrei Sitov with Tass.

QUESTION: Hi. Thank you for doing this.

And I apologize. I was -- for some reason I was waiting for the briefing to begin, but then I was plugged in when the opening remarks were going on. So if my question has been covered in the beginning of the remarks then I apologize.

But my question is to Mr. Buiter and it's about the projections that the Citigroup (ph) may have as to the fair or what it regards as fair exchange rate for the Ruble at this point. And maybe if we, as was mentioned, project an increase in the price of oil by then end of the year then that may be what that would mean for the exchange rate of the ruble.
BUITER: Thank you. Well, the concept of a fair exchange rate in the middle of a financial market blowout where fear, panic and overreaction are the main drivers of the exchange rate, it's hard to come by.

It is clear that with sanctions in place, right, let's assume that March when the first round of sanctions comes up for renewal at least some batch, nothing changes. Europe hangs together. And the oil price, even though it doesn't fall significantly further, remains at the 60 level.

Then I think the current exchange rate could well be if not fair value then sustainable value. So the two key drivers are completely uncertain and indication of one, the oil price, completely beyond the control of any of the parties involved in this matter. And in the case of the sanctions, they're only very partially under Russian control.

So it is -- I don't think that the value of the ruble, given the challenges Russia face at the moment, is unfair. It would have to change those fundamentals, sanctions for oil price, for this to order if as we expect we get a price of oil at the end of the year that is 70 plus, close to 80 than to 50.

And if there is some relaxation of sanctions then it certainly, I think, is possible that Mr. Putin, who seems to have gotten most of what he wants, will declare victory and allow peace to break out.

After all, he's got the Crimea. (Inaudible) federal solution was considerable devolution in Ukraine. And now Ukraine is likely to join either NATO or E.U. in my lifetime. And I intend to live forever.

So I think -- so there is definitely some chance that peace will break out. And at that point, with the oil price 70 to 80, and the sanctions inside, we could see the ruble significantly stronger somewhere between 40 and 50 rather than where it is now.

QUESTION: Willem, very quickly, just to make sure we're clear. When you say oil prices 70 to 80 at the end of the year, is it the end of 2015?

BUITER: 2015, sorry. Beg your pardon.

QUESTION: I just wanted to make sure everyone was clear on that.

BUITER: (Inaudible) everything in 2015. Yes, yes. I've let 2014 behind. The Dutch (ph) New Year was yesterday.

LEVI: Always a step ahead.

BUITER: Right. And if I'm...

LEVI: Can we take the next -- can we take the next question, please.

BUITER: At least follow up.

LEVI: There are a lot of people waiting for questions. So if we can take the next one, please.

OPERATOR: OK. And again, to ask a question please press star, one. Our next question comes from Russell DaSilva with Hogan Lovells.

QUESTION: Hello. Thank you for the very, very clear and learned explanation. I hope my question is not simplistic. And that is how much pressure is too much pressure?

Looking back in history if we see the political and economic isolation that Germany was subjected to after World War I, and we see what eventually happened there. I'm not suggesting that we're in a crisis mode, but do we risk political (inaudible) backlash if these sanctions are too effective?

LEVI: Steve?

SESTANOVICH: Well, you know it's a good question. But I don't think there's any sort of clear answer that you can give to it because the answer in part depends on who is blamed for the result. And Putin has been pretty successful so far at blaming the outside world for all of his distress.

He has accepted some responsibility by saying that there was a kind of failure to modernize the Russian economy. And that's important. But it tends to be a kind of minor theme in his overall picture of Russia at odds with the rest of the world.

You do have to ask how long that claim that this is all the doing of the outside world can survive? And whether there isn't some anxiety even on Putin's part that he has to change course in response to a drastically changed circumstances.

One of the things about Putin is that he's an extremely stubborn guy. But the other side of him is a kind of pragmatism, a recognition of what he's facing, what can be done and what can't be done.

And I think you see all of those elements on display in his, even in his public rhetoric today. He's talking a more cautious and conciliatory line about Ukraine. And that's -- that is something that has been only the result of mounting pressure.

Until you got -- until you got a real increase in pressure, Putin didn't talk that way at all you know. He had -- has had a ceasefire agreement in place that has been in no way respected for three-and-a-half months.

And it's only in a crisis that you begin to see Russian approaches reconsidered by Russian policy makers.

So I would say Putin is the kind of guy that you -- where you need to have a lot of pressure in order to get his attention. But you should assume that he can recognize when there's a need to adjust to his policies.

LEVI: Steve, how much of a surprise is what's happened, particularly over the last week, to Putin?

Obviously he wasn't expecting or constantly expecting this to happen. But is this a contingency that was sort of in his mind? Or is this a holy new world?

SESTANOVICH: I always say I do not do Putin mindreading. So I can't give you a really good answer to that except to say Putin has really good economists around him.

I mean his advisors are now increasingly Western trained, very, very savvy, accomplished, cosmopolitan types who know exactly what's happening in the world economy and know about Russia's own economic vulnerabilities.

He has seen this kind of crisis twice in his you know professional life and high levels of the Russian government. And he's seen how quickly the crisis can come upon Russia.

And he's also seen how quickly it can pass. So he might be surprised by this.

The question is in part whether -- isn't just whether he's taken by surprise, but whether he stays in denial about what has to be done as a consequence. And here I think we can't really have any confidence as to what he's thinking.

The evidence is he's still trying to size up the severity of the situation.

LEVI: Interesting.

Operator, another question on the line?

OPERATOR: Yes, sir. Our next question comes from Miriam Levi with Pira Energy Group.

QUESTION: Thank you. I actually work with Miriam.

But my question's related to if you could give us just a general idea of the outstanding sovereign debt as well as oil company debt that's coming due. And how much of each is denominated in foreign currency versus rubles. Thank you.

BUITER: There's effectively no debt in the country as a whole. This is why the crisis, the financial crisis is very much a private sector crisis with the only exposure of the sovereign being a contingent one should they have to engage -- fuel oblige to engage in large-scale rescue operations.

Total sovereign debt as share of GDP is 12 percent or thereabouts in sovereign debt. And that's a number that of course in Europe, the rest of Europe would murder for.

The total amount of external foreign currency denominated debt of the Russian Federation is, just let me try and get this right. It is about $1.3 trillion in U.S. That's gross liabilities. You have gross assets slightly larger at $1.4 trillion.
So you have a net international (inaudible) position of about, as of March is the latest -- no sorry, as of June, late June of $181 billion in U.S. And as I said, again the latest data we have are as of the end of Q2. The Russian central bank is not too expeditious in releasing this stuff.

The debt coming due then is on the horizon. It was $161 billion that is almost all private. And indeed it's still a lot of debt. The private sector that is all foreign currency denominated.

And then over a two-year horizon it's $90 billion. So that is a considerable amount that would require rolling over or paying off. And at the moment of course that can only happen to the central bank.

And the central bank would be drained if there were no further demands on it for intervention, to serve the sovereign, for bailouts that are not in this data. The bank would be completely drained of reserves within two years at this going rate, and probably faster.

If they refuse to close the capital accounts and there were to be a material run on the ruble at the retail level, as you've seen already. But aggravated at the wholesale and corporate level. Then this could of course be bundled into a much shorter period.

Remember, the exhaustion of reserves need not just be associated with the funding of maturing liabilities right. It can also come from the private sector wishing to take on further foreign denominated assets and skipping the central bank as the only source of such assets.

So it is extremely fragile, extremely vulnerable for Mr. Putin's relaxed heir during his press conference. I don't think he quite realizes how vulnerable his financial sector -- the implication -- his corporate sector are.

As I said, there's a trillion plus of external liabilities, 161 of which are likely to roll over during this year. This is not a place he wants to be. I think Russia is much more vulnerable and looking at a much deeper precipice than I think Mr. Putin acknowledges.

SESTANOVICH: Mike, can I just add two little points here?

LEVI: Absolutely.

SESTANOVICH: The question asked about the debt from Russian oil companies. And I don't have any numbers on that.

But I would think it's a pretty interesting indicator of what Putin knows, perhaps on that score, that several times yesterday in his press conference he talked about how recklessly Russia had taken on a project for the exploitation of energy resources because they thought there was just a quick buck in it.

To me that's you know a reminder that the question is exactly on the right track. It means there has been a kind of leveraging in the energy sector because energy prices were high and people thought they were going to be going higher. And they thought they could get quick profits out of it.

Secondly, people had been wondering about whether given the run on the ruble and given the indebtedness there would be some kind of capital controls. And Putin has indicated that that wouldn't be the case. But there is a kind of effort to try to stabilize the situation by other means.

So that just today, for example, the Deputy Prime Minister Igor Shuvalov, who's one of the Western-trained, savvy economic managers, was appointed to monitor currency sales.

So his job is to deal with the efforts of both the, what they call speculators, but also of companies to get back and forth, you know in and out of the ruble. So they're worried about this.

Willem is right. I think they may not understand the full dimensions of it. But they also understand there are some deep problems here that they've got to try to get on top of.

BUITER: May I comment on the capital controls again? I think the statement there will be no capital controls is about as credible as the statement you used to hear in the days of fixed exchange rates and find (inaudible) below the valuation.

They can never admit to that because as soon as you say we could devalue everybody would take the money out the asset devalue. And as soon as you announce we put in close capital controls, everybody is going to be running to the nearest bank to convert their money into dollars, lot of hard currencies.
So there's no doubt, I think that if the situation doesn't stabilize at roughly the current exchange rates and price of oil then they have no option but to impose capital controls.

That's how it starts. Capital controls first have surrender requirements of foreign exchange from exporters and all that.

But really you can't not get status of a bold frog (ph), and if the central bank runs or threatening to run out of reserves or reduces the buffer to a level considered strategically and safe for a country that's after lines of conflict, has several conflicts on its borders, then they will impose capital controls.

They wouldn't like it. Mr. Putin's administration has so far followed extremely conservative policies. But remember, they imposed capital controls in the Eurozone when they restructured the debt of Cypress.

So the notion that it's off the table is completely unrealistic. I think it's very much on the table, except under a piece of cloth at the moment.

LEVI: We still haven't touched the big question, which is what does this all mean for the Brooklyn Nets and Chelsea Football Club. But we'll leave that for later.

Operator?

OPERATOR: Again, to ask a question, please press star, one.

LEVI: Let me ask both of you a question. Steve, you mentioned that Putin has seen this sort of crisis twice before. Both of you saw this, the last crisis, the 1998 crisis up close.

Steve, when you were working at the State Department, Willem when you were an external member of the Monetary Policy Committee at the Bank of England.

For each of you, maybe Steve first. Are there things that you take away from that experience that illuminate what's happening right now that help you understand what's happening right now?

SESTANOVICH: Well, that was a time where you know Russia faced some similar problems, in particular low energy prices. But it did so from a position of significantly greater vulnerability. I mean there you know the terrible inflation and very low foreign exchange reserves.

The big thing that turned the crisis around was a devaluation that actually proved to be quite positive for the Russian economy, even though the government had been trying for the longest time to avoid it and to protect the ruble at 6 to the dollar, which turned out to be utterly unsustainable.

Overnight they went to 21, 22 to the dollar. And from that point on things got a little better, even though the government was discredited.

This time you may have a government with greater stability that can actually hold on for a bit. But some of the benefits in terms of kind of re-stabilization may -- my question would be, Willem can answer it, whether in some ways it isn't better to have the ruble devalue and deal with a new situation rather than slowly spend money to defend it.

In 2008 you mention another crisis. The central bank spent $200 billion defending the ruble. They're not in a position to do that this time.

It may be that the devaluation that they've experienced is a better course. But I'm raising it only that -- raising that question, not answering it.

LEVI: Willem?

BUITER: I think actually you're right, Steve, that the fact that they have decided not to tie you know their manhood to the exchange rate. It's very chanceable (ph). They would have lost had the tried to defend -- well even 40 or for the better 50 rubles to the dollar.

This is what flexible exchanges are made for, you know, to crack during -- to sink during periods of speculative attack on a currency. And it will bond back when fundamentals improve. So Russia is less vulnerable because they have the right exchange rate regime, a sort of dirty float (ph).

Russia's more vulnerable, I think, (inaudible), however, in that they are more trade dependent than they were in 2008 even. And because they have continued to grow their exports and imports quite significantly, and certainly much more trade dependent than they were in 1998.
For the rest of the world, this really is the one exception, not a significant issue. There is limited financial exposure to Russia.

Foreign corporates by and large, and foreign banks, to some extent, have had ample warning since November 2013 and since the first imposition of sanctions around laws that this was not a good place to have significant exposure to.

So that reduced their exposure to Russia, forced to reduce their exposure sometimes. The only real risk is of course that rather than getting better, as I hope and sort of expect, the Ukrainian-Russian conflict worsens.

We get an aggravation of tensions and -- as we move to level three sanctions. And the nightmare scenario of the cutoff of Russian gas exports to Western Europe, which if it were to happen in the winter would cause certainly a recession in the euro area, and probably an interruption of what global growth we have.

But except for that sort of still risk of level three sanctions and the Russian gas cutoff, I think this is small bear for the global economy. Much less exposure.

Russia, after all, is too clearly -- or was clearly in dollar economy. I don't know what it's now.

But in that case a third size -- less than a third the size of China. It is an eighth or a ninth the size of the U.S. It's 3 percent of global GDP.

It is clearly a Russian tragedy. But it is not, from an economic perspective, a major event. If Russia, in other words, didn't have nukes, right, this would not be a geo-economically significant disturbance.

LEVI: Steve, I want to ask you one last question. If anyone does have any questions, please dial in with the instructions you were given before.

Steve, the context, the geopolitical context for everything that's happening now still is the Russia-Ukraine conflict. What ought we watch for on that front in the next six months?

SESTANOVICH: Well, Willem...

LEVI: (CROSSTALK).

SESTANOVICH: Yes. No, no, no. I understand. Just the key factors.

One of the questions is whether the separatists and their Russian sponsors on the ground, the military units there, act in a way to try to expand their beachhead. And they have about half of the provinces of Donetsk and Luhansk. Whether they try to take all of it.

There are some positive indicators there, and there are some negative indicators. A couple of weeks ago it looked as though they might be starting a new offensive. And that -- you know if that happens, and it could still happen. Then all bets are off because there will be no relaxation of sanctions.

There will be a military escalation. And the -- you know, and the economic consequences in Russia will be that much more severe. Those -- that's the, you know the sort of the positive sign is that offensive didn't materialize yet.

But you still have the Donbas separatists saying we need more territory. Their approach to these talks that where the Russians say they want to be the intermediaries is we have to build out.

We want the Ukrainians to pull back. And that's, again, a formula for a complete deadlock in this situation.

Now, for this situation merely to stabilize is -- can be positive. And you don't have to have a resolution to this. I think the chances are you won't have a resolution. And that will probably get us through the winter.

I would say probably without energy cutoff. There are going to be periodic fears that the Russians will cut off gas to Ukraine. And with complications for oil, I mean energy deliveries to Western Europe.

My guess would be, but it's only a guess. Is that those threats will be very, very carefully made and will be few because the Russians are now more nervous about stirring up antipathy.

And they know -- they've seen what they get when Europe is united against them. And they've seen how angry Mrs. Miracle gets.


And so I think they're going to be -- their line is going to be a cautious and reassuring one where they present themselves. The Russians will present themselves. But this is something to watch for.

As the grownup check on the (inaudible) in eastern Ukraine. The only way that anything can be stabilized. That's going to be Putin's line to Mrs. Miracle, I'm the person who can try to calm this down, me and Poroshenko. But if things take a different turn, if there's a new round of fighting or if there's much more severe hardship in eastern Ukraine, again a possibility, then you know the pressure's on Putin to intervene.

The pressure's on the Ukrainian government to try to take new measures to defeat the separatists. All of that is still going to be even in the middle of winter kind of explosive.

There've been some pretty scary reports about the kinds of problems that you'll face in the winter in these -- you know in these separatist territories because they don't have power.

They don't have seeds. They don't have all that much food. They don't have all that much medical care. I mean things are pretty grim there. And that means that it's still a continuing volatile situation. Let me stop there.

LEVI: If I were to sum up our discussion it would be people might be a bit too worried about the global economic impacts.

Some critical decision makers may not be quite worried enough about the economic impacts within Russia. And the geopolitical front remains enormously uncertain.

Obviously both of you gave us a lot more wealth of detailed insight than that. And thank you, Willem and Steve, for this call. Thank you everyone for joining us. And that concludes our discussion.

OPERATOR: Thank you, ladies and gentlemen. This concludes today's teleconference. And you may now disconnect.

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