Guest Post by Dmitry Orlov
Freddie |
[Last minute update: the repo rate has been just hiked to an eyewatering 17%! At the same time, the percentage of bullshit in the rationale given was lowered significantly: it is to prevent further ruble devaluation. Simply put (perhaps too simply), ruble liquidity for currency speculation has just dried up. At the same time, the central bank is backing long-term investments in industry at a far more reasonable 6.5% rate. Will this be enough to stop the slide?]
On December 11 Russia’s central bank hiked its rate by one percent, from 9.5% to 10.5%. The rationale offered by the bank’s governor Elvira Nabiullina was that this would stop the slide in the value of the ruble. But nobody laughed.
So a more laughable rationale was offered: the rate hike would help contain inflation. Here’s why that’s funny: suppose I am a Russian manufacturer making widgets and now have to borrow at 10.5% instead of 9.5%. I will price my widgets correspondingly higher in order to pay the higher interest. That’s price inflation. Then my workers will start complaining and threatening to defect, and I will have to give them raises; that’s wage inflation. That’s if my widgets are life-saving and people have no choice but to buy them; if my widgets are discretionary and I hike prices, people would simply buy fewer of them, so instead of taking the loan and increasing production I convert my savings into dollars or euros, close up shop and leave the country, telling everyone that I’ve had enough of this Russian central bank nonsense. But what if that’s exactly what the bureaucrats at Russia’s central bank want to see happen? Hmm…
The rate hike didn’t stop the ruble’s slide, for some very obvious reasons. First, a minor one: the very fact of the hike signaled the expectation that the ruble’s slide will continue. In fact, there has been a consistent pattern of Russia’s central bank mouthpieces acting as the ruble’s worst enemies in signaling that they expect it to drop. Second, the major one: speculators, including powerful insiders such as German Gref, president of Sberbank, are dong all they can to push the ruble down while betting that it will go down even more as people try to rescue their savings by selling their rubles. While most regular Russians go to Sberbank to pay their utility bills and municipal fees, a few highly irregular Russians (and a few foreigners among them) go to Sberbank to sit in posh offices in front of trading terminals and gamble away the regular Russians’ savings. The regular Russians are rather upset about this state of affairs, and 70% of them state in opinion polls that they consider currency manipulation to be a crime and want the criminals stopped and punished. Mr. Gref begs to differ and even expressed some political ambitions; is he going to be the next Michael Khodorkovsky?
“We know who the speculators are,” said Putin during his recent state of the nation speech, as the camera zoomed in on Elvira Nabiullina, who blushed and probably peed her panties a tiny bit (I know I would have if I were her). In spite of the Stalinesque overtones, at the moment Putin is pushing on a string. You see, once you staff the central bank with economic liberals trained to follow the dictates of the IMF, and do nothing to shut the revolving door between the central bank and other big banks (after all, if the Wall Street boys can do it, why can’t the Russians?) then why wouldn’t they rob their own people every chance they get, then attempt to use their ill-gotten gains to subvert the political system—just like the Americans have done?
Some people are starting to loudly criticize Putin for his inaction; but what can he do? Ideologically, he is a statist, and has done a good job of shoring up Russian sovereignty, clawing back control of natural resources from foreign interests and curtailing foreign manipulation of Russian politics. But he is also an economic liberal who believes in market mechanisms and the free flow of capital. He can’t go after the bankers on the basis of ideology alone, because what ideological differences are there? And so, once again, he is being patient, letting the bankers burn the old “wooden” ruble all the way to the ground, and their own career prospects in the process. And then he will step in and solve the ensuing political problem, as a political problem rather than as a financial one.
This strategy carries a very substantial opportunity cost. After all, if the central bank acted on behalf of regular Russians and their employers, it could take some very impressive and effective steps. For instance, it could buy out western-held Russian debt and declare force majeur on its repayment until financial sanctions against Russia are lifted. It could drop its interest rate for specifically targeted domestic industries—those involved in import replacement. And, most obviously, it could very effectively curtail the activities of well-connected financial insiders aimed at destroying the value of the ruble. Putin said he knows who they are. I hope that they are wearing adult diapers. I wouldn’t be at all surprised if they get Khodorkovskied before too long.
This conversion of an insoluble financial problem into a mundane political problem may take a bit of time, but once it has run its course the longer-term prognosis is still reasonably good. Russia has very low government debt, huge gold reserves, and in spite of the much lower price of oil its energy exports are still profitable. You see, at the wellhead Russian oil costs much less than shale oil in the US, or Canadian tar sands, or Norwegian off-shore oil, and so the Russian oil industry can survive a period of low oil prices, whereas these other producers may no longer be around by the time the price of oil recovers. Because the ruble has dropped even more than oil, the Russian treasury is going to be flush with tax receipts, and won’t have to try to finance a budget deficit. The 18% or so of revenue that the Russian treasury gets from energy exports is significant, but even more significant are the remaining 82%, much of which come from payroll taxes (some of the lowest in Europe, by the way). And therein lies a bigger danger: that because of loss of access to western sources of financing due to the sanctions, coupled with central bank shenanigans with hiking rates instead of dropping them, Russia’s domestic economy will experience a severe downturn.
With all the political and financial instability sweeping the world, it’s hard to make detailed predictions of any sort, but I will venture to issue just one little health warning: Russia’s central bankers, along with their friends and colleagues in the financial industry, are poised to experience an extreme lack of love from their own people.
I’m printing bankster targets to practice my double tap technique this week-end.I can hit a bankster target at 200 meters with iron sights from my AR-15…not too shabby .
Central Banksters to Love.
How about the ones that saved the world for us.
Greatest bunch of guys you would ever want to meet.
Champions of the little people.
Worried about us and doing all they can for us 24/7
I wonder when they are going to be canonized as Saints, so we may pray and give thanks to them for all their love and concern.
http://3.bp.blogspot.com/-0ZGFcHkqznM/UGBPpf0KjnI/AAAAAAAAC58/avna68ImapQ
/s400/COMMITTEE-TO-SAVE-THE-WORLD.jpg[/img]
The title “Can anybody find me… a central banker to love?” IMMEDIATELY made me thing of this song. How ’bout some Jefferson Airplane this fine morning?
CRANK IT UP BABY …. and find somebody to love … maybe a bankster, even. lol
https://www.youtube.com/watch?feature=player_detailpage&v=YIkoSPqjaU4
US and EU central bankers having a hayday with Russia, I wonder what Russia has in store For US? John
OK … I just cranked that fucker up full blast on my “Creative” external speakers. Trust me … it’s L-O-U-D. hey hey Ms Freud came a runnin and said …”WHAT THE HELL IS WRONG WITH YOU?? I”M ON THE PHONE!!!”
oops.
fuckit. I’m feelin’ mighty righteous right now. That right there, folks, is one of the FINEST female vocalists of all time.
The Russian Central Bank’s “counterattack” lasted 30 mins!
The result of the Russian Central Bank’s hike in interest rates turned out to be worse then my worst nightmares: it reversed the downward spiral of the Ruble for only about half an hour, then the Russian currency resumed its collapse. Rumor has it that the Central Bank might begin buying Rubles next, which I personally don’t see as useful at this point.
I have asked for expert opinions and I hope to get them soon. In the meantime, here is my own take on this which, caveat emptor, is backed by ZERO personal expertise in these matters. Still, for whatever it’s worth, my own speculations:
1) The Ruble is falling due to three completely separate reasons:
i) The recession in the West which triggers a drop in oil prices
ii) The AngloZionist pressures on OPEC not to cut production
iii) The impact of western sanctions
2) None of the above are enough to explain what is happening. The real problem is the lack of credibility of the Russian Central Bank and the Kremlin. Thus the key factor in the fall of the Ruble is distrust of the Russian authorities.
3) This distrust is fully deserved. The head of the Central Bank is a notorious 5th columnist which Putin failed to fire, arrest or otherwise remove from that position. But there is worse:
4) Putin personally is not trusted either, at least not on economic matters. Dmitri Orlov put it very well:
Some people are starting to loudly criticize Putin for his inaction; but what can he do? Ideologically, he is a statist, and has done a good job of shoring up Russian sovereignty, clawing back control of natural resources from foreign interests and curtailing foreign manipulation of Russian politics. But he is also an economic liberal who believes in market mechanisms and the free flow of capital. He can’t go after the bankers on the basis of ideology alone, because what ideological differences are there? And so, once again, he is being patient, letting the bankers burn the old “wooden” ruble all the way to the ground, and their own career prospects in the process. And then he will step in and solve the ensuing political problem, as a political problem rather than as a financial one.
Orlov, as always, is spot on here. Let me explain, as this is crucial:
First, yes, Putin is an economic liberal. I hate to admit it, but I am convinced of it. So while he is “socialist” in a sense of supporting a social state, which helps the poor, needy, sick or old, he also is a “market capitalist” in the sense that he believes that market forces should be left free to maximize the competitivity of an economy. This might be a result of seeing a (pseudo-) socialist system fail or because he sincerely admires the competitivity of US and other (pseudo-) capitalist economies, I don’t know. But there is no doubt in my mind that he is an economic liberal.
Second, it would be typical Putin to let the “Atlantic Integrationist” 5th column to fail so badly as to make their removal a political demand of the Russian people. The problem with that is that this strategic can take a huge toll on the Russian people and economy.
Right now the situation is so bad that the value of some high visibility Russian stocks has begun to plunge. As does the Ruble. As does the price of Brent.
I am not much of an economist, much less so a trader. But I have to agree with the markets here: the current Putin+Nabiulina combo is not one deserving trust and if I had to speculate, I would speculate against Russia right now.
Maybe I am naive or primitive but I see only one way to reverse this death spiral: not only to fire Nabiulina, but to fully nationalize the Central Bank, fire the totality of its current top management and to appoint a new team with Sergei Glaziev as it’s director with a rank of Minister of Finance. Then Russia must take the strategic decision drop the current system of backing each printed Ruble with purchased US Dollar and instead back the Ruble with either energy or metals or a combo of real-word resources. My own vote would go for gold.
The Saker