from Follow the Money

$100b in five months gets my attention …

May 28, 2007

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Monetary Policy

Russia’s reserves just topped $394b – and that is for the middle of May.    On current trends, Russia’s reserves will top $400b by the end of the month.   That is an increase of almost $100b from the $304b Russia had in the bank at the end of 2006.

 

No wonder Russia now talks of a Russian Davos.    And thinks about an investment fund.   If your reserves are growing almost as fast as China’s reserves – OK, $20b used to the pace of China’s reserve growth, but China raised by the bar in the first quarter -- you want a bit of respect. 

 

 

Russia started the year with a lot of euros and pounds in the bank – at least 50% of its reserve are in euros and pounds.   But valuation gains only explain $3-4b of Russia’s reserve growth this year.  Most of the increase is real.     

 

Russia ran a $22b current account surplus in the first quarter on the back of its oil and gas exports.   That surplus may be a bit higher in q2.    Oil prices have moved up.    But given how strongly Russia’s imports are growing (the y/y growth in q1 was well over 30%), I don’t expect a huge increase either.    A $50b current account surplus in the first half of 2007 cannot explain what is likely to be a $115-120b increase in Russia’s reserves.

Clearly, a lot of capital is flowing into Russia now.    Net inflows were $10b in the first quarter (mostly to Russian firms).    The scale of those inflows picked up significantly in q2.   And Russia can no longer hold down the scale of its reserve growth by paying back large chunks of its external debt.  

What does this all mean? 

Well, among other things, it seems like Russia’s financial system has gotten a bit better at creating financial assets that Russians and foreigners alike want to hold.    Private capital is flowing into Russia.   Lots of it.  It cannot all be inflows related to the Yukos auction either.

 

That is progress.  But it also creates some challenges for Russia’s central bank.   A lot of the “oil surplus” is sterilized by the government, which uses its oil windfall to build up its oil stabilization fund (See Gianella for details, along with this OECD publication).   The central bank, by contrast, is solely responsible for sterilizing a surge in capital inflows.   Russia’s central bank – like the People’s Bank of China and the Reserve Bank of India – has raised reserve requirements.   But the money supply is still growing kinda fast.

 

It is also evidence that private markets currently want to finance emerging economies that don’t need the money – Russia, Brazil and China all run current account surpluses and all attract large private captial inflows.   The global financial system only balances because their central banks lend a lot of that money to the US.    

 

Russia only keeps about ½ its reserves in dollars.   But ½ of a big number is still a large number.   Unless the pace of Russia’s reserve growth slows in the second half of the year, Russia may provide the US with over $100b in financing this year.   That far larger than any bailout the IMF ever provided Russia – and way, way more than the US provided Russia to help Russia’s transition.   Strange how things change.

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