Russia, stabilizing speculator?
It seems the Russian central bank has been buying yen when no one else wanted too …
Interesting. At one time, Russia was a source of global financial instability. Now, well, it is a big part of the global market. Nothing like almost $270b in the bank.
Incidentally, the valuation gains Russia’s central bank reported on its reserves in q2 imply that it was holding a bit more than 45% of its reserves in dollars. At least at the beginning of q2. But it could have shifted away from the dollar during the course of q2. Who really knows.
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I would have thought China and the oil exporters of the Middle East would have held more of their reserves in Yen. Why not? Big economy and important currency.
De-construction of Russia: The ‘ultimate prize’
Washington Consensus strategy for De-construction of Russia: The ‘ultimate prize’
For obvious military and political reasons, Washington could not admit openly that its strategic focus, since the fall of the Soviet Union in 1991, had been the dismemberment or de-construction of Russia, and gaining effective control of its huge oil and gas resources, the ‘ultimate prize.’ The Russian Bear still had formidable military means, however dilapidated, and she still had nuclear teeth.
In brief, NATO encirclement of Russia, Color Revolutions across Eurasia, and the war in Iraq, were all one and the same American geopolitical strategy, part of a grand strategy to ultimately de-construct Russia once and for all as a potential rival to a sole US Superpower hegemony. Russia– not Iraq and not Iran– was the primary target of that strategy.
The end of the Yeltsin era put a slight crimp in the US plans. Putin began slowly and cautiously to emerge as a dynamic national force, committed to rebuilding Russia, following the IMF-guided looting of the country by a combination of Western banks and corrupt Russian oligarchs.
Russian oil output had risen since the collapse of the Soviet Union to the point that, by the time of the 2003 US war on Iraq, Russia was the world’s second largest oil producer behind Saudi Arabia.
By the end of 2004 it was clear in Moscow that a new Cold War, this one over strategic energy control and unilateral nuclear primacy, was fully underway. It was also clear from the unmistakable pattern of Washington actions since the dissolution of the Soviet Union in 1991, that End Game for US policy vis-à-vis Eurasia was not China, not Iraq, and not Iran.
The geopolitical ‘End Game’ for Washington was the complete de-construction of Russia, the one state in Eurasia capable of organizing an effective combination of alliances using its vast oil and gas resources. That, of course, could never be openly declared.
After 2003 Putin and Russian foreign policy, especially energy policy, reverted to their basic response to the ‘Heartland’ geopolitics of Sir Halford Mackinder, politics which had been the basis of Soviet Cold War strategy since 1946.
Putin began to make a series of defensive moves to restore some tenable form of equilibrium in face of the increasingly obvious Washington policy of encircling and weakening Russia. Subsequent US strategic blunders have made the job a bit easier for Russia. Now, with the stakes rising on both sides—NATO and Russia—Putin’s Russia has moved beyond simple defense to a new dynamic offensive, to secure a more viable geopolitical position, using its energy as the lever.
Why not yen? How about low carry. That matters a lot for those countries that have to sterilize — they like to get more than 1-2% on their reserves when they are paying more than 1-2% on their assets. Pound has displaced the yen as the number three reserve asset largely because it offers more carry.
Plus, the yen has slipped a bit v. the other reserve currencies recently, so there hasn’t been any cost to being underwieght yen. Or but differently, being overweight $/ euro/ pound v. yen has generated more income and capital gains (relative to a more yen heavy portfolio where the yen allocation would have fallen in $ and euro terms).
As for the oil exporters, they don’t sterilize per se. But their governments do seem to like to get a bit of interest while they wait to figure out what to do with all their funds. Apart from russia, they seem to remain way overweight dollars v euros when compared to their trade — so being overweight dollars v. yen isn’t a total surprise.
Plus, no one pegs to the yen. while lots of folks peg to the dollar.
i put this tentatively as a question rather than a statement – but i do feel that economics and geopolitics tend to be kept in separate boxes on this blog . . .
the russian piggy bank has been boosted by the oil price. so what are reserves for ? would one use be to defend their currency when / if the oil price went into reverse, as it has done before? and who has no oil ? japan. so would the japanese economy and the yen not be getting a substantial boost, at the very time that oil exporters needed back up from their reserves?
this may be ill informed – but surely reserves are managed with broader perspectives than just a speculative punt in the currrency markets?
Gillies – Plausible. but Japan has actually done rather well in the face of rising oil prices recently. Whether from a weak yen or lots of good energy saving technology (hyrbids/ Prius, etc).
On the geopolitical side, russia historically has had some problems with Japan (see 1905 I think) and — this may be dated — there was an unresolved dispute about some islands on Japan’s sorth/ Siberia’s south that stood in the way of better relations. But, you know, times change/ things change and so on.
One other factor — Putin’s russia rather clearly is moving away from the US. See: Georgia. And unlike others with potential geopolitical beefs with the US, they seem keen on reducing their exposure to the dollar. Then again, compared to most, Russia really doesn’t trade (at all) with the US, so it has less of a commercial reason to be wed to the dollar.
First, Japanese firms are pretty much the most efficient manufacturers on earth per unit of energy consumed so rising energy costs only make Japanese exporters more competitive relative to their competitors abroad.
Second, Russia doesn’t care about propping others up in the international trading system (such as China vis-a-vis the US). Moscow may just want to make money on its foreign reserve holdings. If they have the money and the time, betting that the yen rises against the dollar in the future seems safe. It will be hilarious if Russia makes money as China, Japan and the GCC lose value “when” the dollar declines.
Russia buys liquidity and pays premium.
Who cares a negative carry of 2% when the reer yen is 30% undervalued?
“…An economic downturn could boost the share of delinquent loans and lead to a bank failure, putting Russia’s fragile banking system at risk. “Our banking system is replete with rumors, and even one default can trigger rumors of other bank defaulting…” said Vladlen Kuznetsov, a banking analyst at Moody’s Investors Service… two of the banks that dominate retail lending… get much of their funding from bank loans and bonds rather than from deposits, which means they have little risk of collapse if the country sees a run on deposits. Still, some analysts worry that as banks extend loans to a wider cross section of society, the rising delinquency rates will be difficult to detect. The volume of loans has been growing so fast — doubling in 2005 — that the amount of nonperforming loans as a percentage of loans outstanding can be deceptive…”
re: “Putin’s russia rather clearly is moving away from the US”
aren’t ‘Russian’ relations in general – internal and external – a bit murky? explosive? just looking at recent headlines.
“…Japan has long been awaiting the completion of this project, which would provide it with much-needed natural gas, free of the geopolitical unpredictability associated with Middle Eastern supplies. Abe quickly responded Tuesday that the cancellation of the project will negatively impact Japanese-Russian relations…” http://www.stratfor.com/products/premium/read_article.php?id=275854&selected=Analyses
“…Lukin argued that the United States and Russia share identical interests where nuclear proliferation is concerned… Lukin noted that this would not necessarily be in China’s interest. He concluded that “true patriotism lies not in taking on a hysterical anti-Western attitude, but in promoting the real strengthening of one’s own country.” 10/16/06 http://www.rferl.org/newsline/fulltext.asp
“…The Kremlin’s escalation of it is an extreme example of another Soviet habit Mr Putin has inherited: using foreign enemies as scapegoats and tools in domestic politics. Past targets have included America, Ukraine, and foreign do-gooders allegedly engaged in espionage… This scaremongering is matched by the Kremlin’s shifting stance towards xenophobic nationalism…” http://economist.com/world/europe/displaystory.cfm?story_id=8031597
“…Canadian lawyer Robert Amsterdam, who has battled Russian officials over the sale of assets belonging to OAO Yukos oil group and the jailing of its chairman Mikhail Khodorkovsky, said Petrocan is playing a dangerous game by partnering with Gazprom. “At the end of the day, Petro-Canada is going to have to come to the realization that Gazprom is a political organism, as opposed to a normal corporation…” he said the Kremlin is determined to use its growing energy prowess to extend its political leverage in Europe…” http://www.globeinvestor.com/servlet/story/GAM.20061016.RPETROCAN16/GIStory/
“Andrei Shleifer has weathered a lot in recent years, including a legal settlement in which Harvard University agreed to pay $26 million to resolve claims that he and other leaders of a project in Russia were liable for conspiracy to defraud the United States government…” http://www.insidehighered.com/news/2006/10/13/shleifer
Brad–The report the Russian central bank is buying the yen surprised me, since the interest rate differential between the US and Japan is still large, and will continue to be so for the time being.
However, by second thought, the Russian decision might be just right in timing; the dollar may soon start to depreciate against major currencies in view of the likely US economic slowdown in coming quarters, and Japanese investers investing in the US government bonds without hedging and hedge funds making yen carry trade may rush to unwind their operatins.
But, I really don’t know whether this will become the trigger of the yen appreciation and the dollar depreciation, although both of them are enevitable anyway.
It is hard to assign geopolitical or pecuniary motives to this move.
Almost all of Russia’s natural gas revenues are in euros, while oil brings in a less unbalanced mix of euros and dollars. Expanding goods trade with China seems to be intermediated via dollars.
With the expansion of Sakhalin I and the start of Sakhalin II–assuming Shell stops playing the Russians for fools, that is–the regulation of the yen-ruble rate will become more of an issue for the central bank. But the present trade relationship hardly necessitates building up a yen position now.
Prudent portfolio diversification seems the most likely motive, with the current relative cheapness of the yen as the sweetener. Given the abysmal rate of interest available from JGBs, it is not hard to imagine the Russian central bank keeping its entire stash of yen in bank deposits.
Prudent portfolio diversification has to be part of it – difficult to believe they would intentionally take a bad position. But as politics is integral to economics and profit making, it can’t be ignored. Analysis of the politics behind Russian economic resurgence – necessary to determine its stability or lack of it – is severely lacking. As it stands, anyone’s view of what ‘Russia’ means – and how that translates into it external relations, are largely dependent on what and who one reads and decides to believe – if the writers are able to get their views into circulation at all.
“…This week George Bush, Tony Blair, the German Chancellor, Angela Merkel, and Jacques Chirac deplored what the French President, in a letter to Politkovskaya’s adult son and daughter, called a “hateful murder”. Politkovskaya would have found their concern ironic: these were the very leaders she charged with cosying up to the Russian regime…” http://www.smh.com.au/news/world/a-tough-crusader-falls/2006/10/13/1160246329657.html
so brad, besides the serious carry issues involved, is there any hope for the yen to play a greater role as a reserve currency? especially if japan stops actively trying to weaken it (as it has for 18 months running, and likely longer…)?
actually, make that 2-1/2 years w/o intervention from japan
No sure that JPY is gonna reemerge as a big-time reserve currency. but if it just stopped slipping as a reserve currency, that would be a change. A constant share of a growing (reserve) pie is rather different than a falling share of a growing (reserve) pie. but you have to be confident the JPY is close to hitting a bottom before you would want to hold a lot of it, given the negative carry (as all markey folks know).
so what is the proper attitude to take to a country that decides to hold whole vaultloads of your currency as part of its reserves? is it ‘thanks for your support’ or is it ‘these guys are planning to dump the lot one day and undermine our entire economy.’ ?
and another question – is it worse to bomb/antagonise a country whose currency you hold ? or one which holds your own currency ? or is nuclear supremacy simply an expensive and useless asset in an economically interconnected world ?
Gillies — I think the US is (quietly) struggling to come up with an answer to your first question.
Off topic — i liked the poem at the top of your blog as well.