Prime Minister Dmitry A. Medvedev of Russia, center, held a meeting on economic issues on Wednesday in Moscow. Credit Pool photo by Dmitry Astakhov
Updated, 7:25 p.m. | Just a couple of months ago, President Vladimir V. Putin of Russia confidently told business leaders that the country could withstand the economic storms. If foreign investors continued to withdraw money, he said, the government could simply tap its sizable reserves to help.
Now, his strategy faces a test.
With oil prices plummeting and the ruble in free fall, Russia is increasingly dipping into the country’s resources, including the approximately $400 billion pool of foreign reserves. On Wednesday, the government said it would spend as much as $7 billion to help prop up the ruble, a move that helped soothe the markets.
The question is how far Russia’s resources will go.
The ruble remains volatile. With the Western sanctions over the Ukraine crisis, some Russian companies, which have large piles of debt, are running out of financing options. And not all of the country’s reserves can easily or quickly be used.
“There’s enough firepower in the national balance sheet to pay back through 2016,” said Christopher Granville, a managing director at Trusted Sources, an emerging markets research group in London. “But then it is not inexhaustible.”
Russia certainly has a lot of money at its disposal. Of the $400 billion, about half is easily accessible. About $90 billion is used to cushion the blow of falling oil prices.
The National Welfare Fund, its sovereign wealth fund, has about $79 billion. But some economists argue that some of that money has been committed to other long-term investments in Russia.
Russia’s oil-dependent economy — oil and gas revenues make up about 50 percent of the budget and 60 percent of exports — also complicates the calculus. When prices are high, windfall profits are stashed away to help the ruble when it weakens. But with oil dropping, Russia isn’t likely to be putting away much extra money and the existing funds could go to replace Western lending.
Problems loom on the horizon.
Sanctions have made it difficult for Russian companies to tap the global markets, and debts are coming due — fast. Russian corporations and banks are scheduled to repay $30 billion in foreign loans this month. Next year, the tab rises to $130 billion.
Large companies, like Gazprom, that earn revenue in other currencies should be in better shape than the rest. Companies without options will have to run to the government for help, putting additional strain on the country’s reserves.
Russia is already putting in place a system to bail out corporations cut off from Western financing by dipping into one of the two sovereign wealth funds. The first applications are being approved now.
“Corporate defaults will happen,” said Lubomir Mitov, chief economist for Europe at the Institute of International Finance. He said the thing to watch was not today or next quarter, but what happened if oil stayed at $50 or $60 a barrel. It is now around $60. “Then the wave of corporate defaults comes in the second half of next year and then it becomes worse over time,” he said.
The ruble also remains a significant wild card.
Russia has already been aggressively tapping its resources to defend the currency. On Wednesday, the finance ministry said the government would be selling foreign currency holdings to support what it said was an “extremely undervalued” ruble.
We will sell “as much as we need to,” Alexei V. Moiseev, the deputy finance minister, told journalists, the Interfax news agency reported.
The measures seemed to calm the markets, with the ruble settling at around 60 on Wednesday. It closed at 67.50 on Tuesday, when it swung wildly to about 80 rubles to the dollar after starting the day at 64.
“We are seeing the level of sophistication and synchronization of efforts here to stem the ruble’s slide is gaining more traction,” said Luis Costa, Citigroup’s head of strategy for Central and Eastern Europe, the Middle East and Africa.
The Russian central bank has been spending big to defend the currency.
Since the start of the year, it has used more than $75 billion to prop up the ruble. In December, it has sold more than $10 billion in foreign currency, including nearly $2 billion on Monday alone.
But the piecemeal strategy has largely proved fruitless, said Benoit Anne, head of Emerging Markets Strategy at Société Générale’s corporate and investment bank.
“There are differing ways to spend $10 billion in reserves with differing impacts,” he said, noting that making big clips of $5 billion to $8 billion was more effective than $1 billion to $2 billion at a time. “You do it in one go and create fear in investors.”
This week, the central bank took even more drastic action, raising interest rates to 17 percent, from 10.5 percent, in an emergency middle-of-the-night bid to halt the currency’s slide. But rather than reverse the downturn, the move accelerated the panic, as the market interpreted it as an act of desperation. The currency weakened substantially, with investors worrying that more extreme measures could follow, like capital controls.
“I still believe Russia is far away from capital controls,” Mr. Costa said. “I truly believe the authorities understand if they delve into strong capital controls, credit worthiness will be the main victim.”
What measures will be needed will depend on how businesses and the markets react in coming days.
Prime Minister Dmitry A. Medvedev on Wednesday tried to dampen concerns that the Russian government would impose capital controls, saying that there was no sense in introducing “extremely harsh measures.”
Later in the day, he convened a meeting with the directors of the country’s largest exporters, including the director of the oil giant Rosneft, the head of Gazprom, as well as the directors of oil companies like Lukoil, Surgutneftegaz and the recently nationalized Bashneft. In the meeting with business leaders, Mr. Medvedev portrayed the ruble’s recent fall as the product of sanctions and weak oil prices, which he said were beyond Russia’s control.
He pushed them to convert their foreign currency from exports into rubles, according to a transcript on the government website. Mr. Medvedev also encouraged the exporters to sell the money “rhythmically and stably” in order to avoid exchange rate spikes. Analysts have said that exporters may have been holding on to their foreign currency as the ruble’s exchange rate fell rather than converting it back into rubles.
Mr. Medvedev also reiterated that Russia would stand behind businesses. The government, he said, was ready to help both by direct support and by supporting demand.
“You know that there are enough currency resources in the country to achieve all the economic and production goals that you have set,” Mr. Medvedev said.
An earlier version of this article misidentified the Russian ministry that was engaged in asset sales. According to Interfax, it was the Finance Ministry, not the Foreign Ministry, that had already begun the sales. The article also misidentified the types of assets that were being sold. They are currency reserves, not the ruble currency.
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