Dedollarisation

Political Downgrade of Russia Credit Is the Third Wave of Western Sanctions

Andrew Korybko

Took Russia debt (13% of GDP, $400 bn in reserves) to just above junk

Russia Insider,

26 November, 2014

Credit rating agencies are predicting quite a storm for the Russian economy, and they are therefore threatening to lower the country’s status to ‘junk’ level. Just as a weatherman may be incorrect about their storm predictions, so too may a ‘financial meteorologist’, except the latter has ulterior motives in doing so.

S&P has joined Moody’s in launching an attack on the Russian economy, hoping that the threat of lowing Moscow’s credit status will somehow translate into political changes in Eastern Europe. 

Although such an idea may seem plausible in theory, in practice it’s absolutely disjointed from reality and merely symbolizes the third wave of the economic war on Russia. 

This coming economic storm, cooked up in the West, is going to come up against the multipolar storm breaker of Russia and China’s own Universal Credit Rating Group (UCRG), expected to become active later this year. When the waves inevitably crash, the West may find that it has unwittingly and irreversibly damaged its own unipolar economic defenses and opened up a flood of multipolarity.

There have thus far been two major waves of economic warfare waged against Russia, with the third one well on its way. They are as follows:

Sanctions against the Russian economy and certain individuals.

First:
The US and the EU enacted selective and then generalized sanctions against the Russian economy and certain individuals, apparently under the false belief that Russia is Zimbabwe and can somehow be bullied via these means. They weren’t successful in this attempt and thus decided to escalate the conflict to the next level.

Second:

This wave brought about the oil and currency war against Russia, opening up a Pandora’s Box of repercussions that may unintentionally spell the end of fracking in the US (or at least its suspension), among other things.

Nonetheless, the main objective here was to destroy what is inaccurately viewed as the lynchpin of Russia’s economy (oil and gas) and create the conditions necessary for a Color Revolution. As with the first wave, the second one also failed to achieve its goals.

Third:

Enter the third wave, which is what Russia is on the cusp of experiencing. The strategy here is to use institutional ratings agencies to damage Russia’s international economic reputation in the hopes that this can help ‘isolate’ it from the non-Western markets that it has recently (and quite eagerly) engaged. 

This plan is dead in its tracks, since Russia’s rating was worse in 2005 but it was consistently growing at around a 7% average during the period 2000-2008, showing the inherently political (and economically ineffective) nature of Western ratings.

The Multipolar Storm Breaker

Shielding Russia and the multipolar world from the West’s politically minded economic ‘ratings’ is the formation of an alternative agency constructed in cooperation with China, the Universal Credit Rating Group (UCRG). 

This forthcoming buffer, if it can build the necessary trust and objectivity, could realistically help the non-West weather the oncoming ‘financial storm’ that the Western agencies are all hyped up about.

When The Waves Finally Crash

The ‘financial meteorologists’ may be in for a surprise when their politically constructed storm hits the multipolar breakers, as the resultant back-splash may reverberate with unintended consequences.

Although it is still a relatively far time away in the future, especially considering the rapid and somewhat surprising transformations that have been taking place in all spheres over the past couple years, an increasingly possible scenario is beginning to take shape, and that’s the macro-structural division of the world into entities (not necessarily states) supporting the retention of the unipolar world and those advocating the construction of the multipolar one.

This is seen in all spheres (as was earlier touched upon), and the creation of the UCRG, especially given the current ‘New Cold War’ context, must be understood as being the next logical extension of this.

As the world divides itself into either the pro- or anti-multipolar camp, the emerging dichotomy will come to define international relations for the entire century or until one side capitulates.

Given this dynamic, it is a very realistic possibility that certain states will ‘switch sides’, just as occurred during the ‘Old Cold War’, either by force (whether covert or overt) or by choice.

Something that may sway various states towards multipolarity could be the creation of regional agencies and institutions to complement inter-regional (‘Greater Multipolarity’) ones, for example, a credit ratings institution specifically for Latin America.

Likewise, if the unipolar world continues its political designations of supposedly impartial topics such as the economy and does so in favor of geostrategic on-the-fence states, it could find itself gaining new allies.

No matter how things play out, though, it’s evident that a global competition is definitely taking place between the unipolar and multipolar worlds, and that this is being fought on all levels, including the financial institutional one described within this article.

Concluding Thoughts

The West is poised to launch the third wave of its asymmetrical economic war against Russia, but it’s predictably bound to fail in inflicting the damage it has in mind.

Russia and China, the two anchors of the multipolar world via the Russian-Chinese Strategic Partnership, are taking the initiative in creating an alternative institution to counter the West’s politically motivated economic ratings.

This creates more openings for the actualization of full-spectrum multipolarity, whereby this concept makes the leap from the geopolitical to the institutional, with the long-term potential of rivaling (and perhaps unseating) the West’s ‘supremacy’ in the targeted fields.

Importantly, however, this entire episode portends the division of the world into two camps, with the unipolar and multipolar worlds slated for their inevitable face-off sometime later this century.

Russian Central Bank Bans Western Ratings Agencies

Zero Hedge,

19 January, 2015

On the heels of last week's downgrades by Fitch and Moody's to just above junk status, The Central Bank of Russia (CBR) has issued a statement that it will no longer use credit ratings from Standard & Poor’s, Fitch, or Moody’s that were assigned after March 1, 2014. All credit ratings will now be at the discretion of the Board of Directors of the Bank as regulators assess whether or not the ratings made after March are accurate. Sounds like Spain, Greece, and USA's previous derision over ratings agencies proclamations is heading east.

As RT reports,

The Central Bank of Russia will no longer use credit ratings from Standard & Poor’s, Fitch, or Moody’s that were assigned after March 1, 2014.

 

All credit ratings given to Russian companies and banks will now be at the discretion of the Board of Directors of the Bank,according to a press statement Monday. The regulator will assess whether or not the ratings made after March are accurate.

 

The decision comes after Fitch and Moody’s downgraded Russian sovereign debt to just above junk status. Standard & Poor’s will decide whether it cuts Russian debt to junk level by the end of January after cutting it last April, after Crimea rejoined Russia and the West began to levy sanctions against Moscow.

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Full CBR Statement:

On dates of credit ratings’ use for the purpose of Bank of Russia regulations

 

In line with scope of authority established by Bank of Russia Ordinance No. 3453-U, dated 25 November 2014, ‘On the Specifics of Credit Ratings’ Use -to Implement Bank of Russia Regulations’, the Bank of Russia Board of Directors determined the dates when credit ratings shall be assigned to implement Bank of Russia regulations.

 

Under this Ordinance, should any Bank of Russia regulation contain information on credit rating assigned by Standard&Poor’s or Fitch Ratings or Moody’s Investors Service to credit institutions or other Russian legal entities, constituent territories, municipal entities, their issued securities or other financial instruments, the date when the mentioned rating is assigned (hereinafter, the rating date) may be determined by the decision of the Bank of Russia Board of Directors in the corresponding regulation.

 

According to Bank of Russia Board of Directors’ decision, the rating date for credit institutions and their issued financial instruments, including securities, to implement Bank of Russia regulations, shall be 1 March 2014; as for other entities, listed in the Ordinance, and their issued securities, this rating date shall be 1 December 2014.

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Ben Aris recently noted:

“They’re private companies, so we assume that they’re completely independent and not subject to political pressure.

 

However, they do exist in an American context and are subject there to the international media’s reporting which tends to give a single narrative – a very negative narrative when it comes to reporting – particularly the Russia story,”

All sounds very similar to the responses that troubled and over-indebted western nations had when the ratings agencies dared to downgrade them.

"De-Dollarization" Deepens: Russia Buys Most Gold In Six Months, Continues Selling US Treasuries

Zero Hedge,

18 January, 2015

The rumors of Russia selling its gold reserves, it is now clear, were greatly exaggerated as not only did Putin not sell, Russian gold reserves rose by their largest amount in six months in December to just over $46 billion (near the highest since April 2013). It appears all the "Russia is selling" chatter did was lower prices enabling them to gather non-fiat physical assets at a lower cost. On the other hand, there is another trend that continues for the Russians - that of reducing their exposure to US Treasury debt. For the 20th month in a row, Russia's holdings of US Treasury debt fell year-over-year- selling into the strength.  

Buying low...

Russia gold reserves jump the most in six months in December, near the highest since April 2013...

and selling high...

Russian holdings of US Treasuries are now at the 2nd lowest since 2008...

It would appear the greatest rotations that no one is talking about are the fiat to non-fiat and the paper to physical shifts occurring in China and Russia.

Charts: Bloomberg

Some have commented on the "unprecedented" capital flight from Russia, but as Dr. Constantin Gurdgiev explains - Western 'analysts' appear to have forgotten a few things...

Central Bank of Russia released full-year 2014 capital outflows figures,prompting cheerful chatter from the US officials and academics gleefully loading the demise of the Russian economy. 

The figures are ugly: official net outflows of capital stood at USD151.5 billion - roughly 2.5 times the rate of outflows in 2013 - USD61 billion. Q1 outflows were USD48.2 billion, Q2 outflows declined to USD22.4 billion, Q3 2014 outflows netted USD 7.7 billion and Q4 2014 outflows rose to USD72.9 billion. Thus, Q4 2014 outflows - on the face of it - were larger than full-year 2013 outflows.

There are, however, few caveats to these figures that Western analysts of the Russian economy tend to ignore. These are:

• USD 19.8 billion of outflows in Q4 2014 were down to new liquidity supply measures by the CB of Russia which extended new currency credit lines to Russian banks. In other words, these are loans. One can assume the banks will default on these, or one can assume that they will repay these loans. In the former case, outflows will not be reversible, in the latter case they will be.
  
  
• In Q1-Q3 2014 net outflows of capital that were accounted for by the banks repayment of foreign funding lines (remember the sanctions on banks came in Q2-Q3 2014) amounted to USD16.1 billion. You can call this outflow of funds or you can call it paying down debt. The former sounds ominous, the latter sounds less so - repaying debts improves balance sheets. But, hey, it would't be so apocalyptic, thus. We do not have aggregated data on this for Q4 2014 yet, but on monthly basis, same outflows for the banking sector amounted to at least USD11.8 billion. So that's USD 27.9 billion in forced banks deleveraging in 2014. Again, may be that is bad, or may be it is good. Or may be it is simply more nuanced than screaming headline numbers suggest.
  
  
• Deleveraging - debt repayments - in non-banking sector was even bigger. In Q4 2014 alone planned debt redemptions amounted to USD 34.8 billion. Beyond that, we have no idea is there were forced (or unplanned) redemptions.

So in Q3-Q4 2014 alone, banks redemptions were scheduled to run at USD45.321 billion and corporate sector redemptions were scheduled at USD72.684 billion. In simple terms, then, USD 118 billion or 78 percent of the catastrophic capital flight out of Russia in 2014 was down to debt redemptions in banking and corporate sectors. Not 'investors fleeing' or depositors 'taking a run', but partially forced debt repayments. 

Let's put this into a slightly different perspective. Whatever your view of the European and US policies during the Global Financial Crisis and the subsequent Great Recession might be, one corner stone of all such policies was banks' deleveraging - aka 'pay down of debt'. Russia did not adopt such a policy on its own, but was forced to do so by the sanctions that shut off Russian banks and companies (including those not directly listed in the sanctions) from the Western credit markets. But if you think the above process is a catastrophe for the Russian economy induced by Kremlin, you really should be asking yourself a question or two about the US and European deleveraging policies at home.

And after you do, give another thought to the remaining USD 33 billion of outflows. These include dollarisation of Russian households' accounts (conversion of rubles into dollars and other currencies), the forex effects of holding currencies other than US dollars, the valuations changes on gold reserves etc.

As some might say, look at Greece… Yes, things are ugly in Russia. Yes, deleveraging is forced, and painful. Yes, capital outflows are massive. But, a bit of silver lining there: most of the capital flight that Western analysts decry goes to improve Russian balance-sheets and reduce Russian external debt. That can't be too bad, right? Because if it was so bad, then... Greece, Cyprus, Spain, Italy, Ireland, Portugal, France, and so on... spring to mind with their 'deleveraging' drives...

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