Tuesday, December 16, 2014

Can anybody find me... a central banker to love?


[Final update: the ruble seems to have stabilized, for now, and China has declared its support for the Russian economy, but the problem with devaluing currencies is by no means limited to Russia. In the meantime, Russia has stopped grain exports, so we should expect Arab Spring 2.0, because Russia is where couscous comes from. Also, I hear Krugman has declared that the world is not only flat but only a bubble; I wouldn't know since I don't pay attention to him, so please stop asking me.]

[Early morning update: in case you had any doubts, the intervention didn't work. Ruble and oil are continuing to plunge amid increasing financial market turmoil throughout the world.]

[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.


forrest said...

When he realizes the nation can't afford the comedy, he'll lay off a few clowns...?

There is the option Ellen Brown keeps trying to raise -- central banks that actually function as government services, make no attempt to make a profit for anyone at anyone's expense.

Anonymous said...

I was wondering what the heck they were doing. So instead of doing a Yankee Double-down (like canceling Dodd-Frank and giving WS the keys to our FDIC-insured savings accounts) they are crashing on purpose? If so I hope they have a decent phase 2 plan waiting on he back burner.

Rhisiart Gwilym said...

Here in Britain, radicals - genuine ones, that is - speak wistfully about the times when enraged commoners hang hated oppressors from lamp-posts. (In England in particular, nothing of this sort has happened since the middle of the seventeenth century, when the parliamentarians beheaded Charles Stewart).

But in Russia, and in former Ukraine, the Rus peoples have enough iron in their souls already, from the experiences of the past century - still strong in many living memories - to be able to do what the Westerners just muse about.

How long will it take before some such modern equivalent of 'To the lamp-posts!' becomes again the active intent of critical masses of Rus citizens, in both countries?

In principle, this need only be symbolic, and could actually mean simply: to prison with them; let them cool their heals in complete ineffectualness for a decade or so, just as Khodorkorsky was effectively castrated. But otoh, Rus peoples have suffered, and are again suffering in FUkr, sufficiently to build serious pressure for literal lamp-post action...

That would have the headless chickens amongst the Beltway Bozos and the Brussels Unterbozos running around in shock, just as they have been over Russia's unilateral cancellation of South Stream, screeching: 'He can't do that! Can he? He can't - surely...'

I love that observation of Saker's: that in Washington, the Bozos *announce* their nefarious realpolitikal plans; and those they don't announce they telegraph. But in the Kremlin they give no warning; just act decisively when the time is ripe; e.g., the swift, non-negotiable enosis of Krim; critically essential to Russia's vital interests, so done unanswerably whilst the WashBrush Bozos were still formulating babbling responses and stances to it).

Ugo Bardi said...

Hi there, Dmitry. This is a bit off topics, but you may be interested in the series of posts on the "Seneca Cliff" - the rapid post-peak collapse - that I am publishing on "Resource Crisis", (formerly Cassandra's Legacy). I have some new models that go a bit more in depth than the model that you encouraged me to develop a few years ago. The latest one is at


If these models are right; I think we are going to see a rapid collapse of the economy in the coming years. "Rapid" must still be understood in relative terms - but it may be kind of much too rapid for most people's taste.

John Day said...

$US:Russian-Ruble trading is halted.

S.Treimel said...

I live in the southern US.
Would street theatre be effective at expressing public anger? If mannequins dressed as WS bankers with plastic masks were hung on lampposts, would this convey the message?
I'm not sure how the law would react to that. I know that lynching a real live white person is a felony, but would lynching a lifeless dummy be considered a crime?
Maybe someone more familiar with case law could comment.

Dime novels from Oblivion said...

“We must learn to live in a new reality, to focus more on our own resources to finance projects and give import substitution a chance,” the bank chief said in a televised address Tuesday.
Might it be possible Russia is intentionally severing itself from a world financial system it knows is about about to erupt?

Unknown said...

"But he is also an economic liberal who believes in market mechanisms and the free flow of capital. "

In the end, I think Putin's nationalism will trump whatever liberal market ideology he might or might not hold.

And when that happens, I agree with the adult diaper analogy, as a lot of Russian oligarchs will need them.

Russia has another out, which I think eventually will happen, but not for a number of years -- conversion to the yuan. Slowly but surely the BRICs have tried to move away from the petro-dollar, constrained by the US military might.

Russia would have to acknowledge the real politik of Chinese dominance, but I think it could do so with dignity and an equal or near equal partnership. After all, China and Russia have sealed a lot of major deals in the last few years.

A giant train of 82 container cars just arrived in Spain last week, traveling 13,000 K all the way from Yiwu in China’s Zhejiang province, 300 kilometers south of Shanghai. China intends to build a lot of these trains and to make it a two day train trip from Europe to China.

Mister Roboto said...

As of about noon today EST, it really looks like the hemorrhaging of the ruble has been at least momentarily stanched.

michigan native said...

Paul Craig Roberts, who I have found to be brutally honest and objective in dealing with world events, states that Russia has yet to unleash their "black swan" event, actually 2 moves that will bring Europe to its knees. http://kingworldnews.com/paul-craig-roberts-russia-unleash-ultimate-black-swan-west/

What are people's takes on this? I see Putin as acting very patient and dignified thus far, using diplomacy where the Obama regime, the neocons, and the puppet governments in Europe follow the US meek and obedient, can do nothing but issue threats.

It is obvious that they are trying to bring down Putin by collapsing the Russian economy, but what are the ulterior motives for suddenly being friendly to Cuba? Are there some suspected oil reserves in Cuban territorial waters, or were the Russians making business deals with them?

In any event, the neocons cannot and should not be trusted and I think Castro's brother (Rafael??) knows better. Maybe they plan to orchestrate a Ukrainian style coup on that tiny island nation as well? Any takes on what sordid stunts the neocons have up their sleeves with Cuba?

michigan native said...

All the cards are in Russia's hands.. http://kingworldnews.com/dr-paul-craig-roberts-12-20-14/

Ivan Lukic said...

We must understand that after recently buying huge gold quantities (Russia now has over thousand metric tons, little more than China), gold makes only tiny proportion (10%) of Russia's reserves. Almost 90% is Western "hard" currency. Destroying Banksters World Government is gigantic task that requires cooperation with other big players. Putin understands that it can not be done overnight.

Reverse Engineer said...

The main question is whether Vlad can keep it together long enough to collapse the Western banking system.

They should dump Rubles, default on Western debt, expropriate all assets of Exxon Mobil, Royal Dutch Shell, BP etc, transition currencies using Renminby and send a few folks Sleeping with the Fishes.