I have been busy this week accumulating Russian assets, as the Ruble sell-off reached manic proportions. I even was not able to buy as much as I wanted due to the fact that Tuesday afternoon – at the height of the panic when EURRUB was around 96 – my broker could not find willing counterparts who would trade RUB with him for fear of capital controls.
Yes, that’s right: yours truly almost was lucky enough to get in at what now looks to have been the bottom, but was not able to buy a rapidly depreciating currency in sufficient quantity!
I have traded quite a few EM panics, but I had never experienced anything similar. This left me somewhat perplexed which is why I did not think about the possibility of buying ADRs in London – the only viable option at the height of the panic.
In the next days I will try to find time and explain my rationale in detail, for now I just want to make a few short remarks.
I am supposed you are familiar with the bearish view, as most newspapers are full of gloomy headlines and pundits on TV explain how this looks like a repeat of the 1998-99 Russian crisis. So, I will not repeat them here.
If you have time for maximum negativity, I highly recommend the streetwise professor who is as bearish on Russia as you can get. I do not remember him having said anything positive about Russia ever (the same goes for his followers if the comment section is any guide) – this serves as a valuable anchor.
But now, let’s look at a few facts
According to this Bloomberg article, Russia, in 1999, had less than USD 13bn in reserves versus USD 133bn in external debt, i.e. external debt load amounted to 10x reserves in 1999 – very bad, no doubt!
What about today?
Via FT-Alphaville I got this chart produced by BNP Paribas. It displays the evolution of external debt vs. reserves since 2008.
According to the chart, total external debt (private AND government, mind you) stands at USD 600bn (ahem, that’s just slightly higher than Greek government debt) vs. USD 400bn in reserves, i.e. a factor 1.5 x (vs. 10 x in 1999).
It is hard for me to see how this is a repeat of 1998-99, but then I am not a journalist at the FT.
Note, how the team at Paribas only uses central bank reserves and seemingly ignores the FX assets at the National Wealth and Reserve Fund. I deduce this from their headline which says that Russia is twice as levered as in 2008. This statement only makes sense if you compare external debt to central bank reserves only (dotted line) excluding the two funds’ assets.
There is of course no good reason to exclude said funds from our calculation, as all these assets are perfectly available to meet FX refinancing demand.
To summarize: according to this metric Russia was not levered at all in 2008 and is slightly levered today.
Manageable, I would say.
But does the metric (reserves to debt) tell the whole story? After all we know that some Russian companies faced USD shortages and had to be bailed out, despite the fact that aggregate reserves matched external debt in 2008?
As is well-known, an aggregate conceals very important relationships and is a poor basis for decision-making. For instance, when talking about liquidity the maturity structure of the liabilities is often much more important than their size. And indeed, the following chart by Goldman shows how the short-term net cash position of Russian corporates was dangerously depleted going into 2008 – the opposite situation of today, where it stands at a record 90bn. The same goes for Russian banks (second chart).
Again, judged by this metric the system looks even better prepared than in 2008, let alone 1999!
With the notable exception of Rosneft’s 44bn short-term debt overhang (stemming from a dumb acquisition) most big Russian corporates I have managed to look at in the last few days are comfortably financed until the beginning of 2016. And by then they should have generated enough FX to meet longer term redemptions as well. Many journalists seem to forget that for most of these companies it is prudent to have USD liabilities as their revenues are in USD as well, i.e. they are naturally hedged.
Summary: that 44bn doesn’t strike me as an unresolvable problem. It certainly isn’t going to ruin Russia.
But what about bank runs? Aren’t the Russians converting their RUB into hard currency?
You bet they are!
But, again, how big is the problem?
The following chart, again via Goldman, compares central bank reserves to aggregate money supply (M2),
Interesting: at current USD/RUB rates Russia’s reserves cover basically most of its money supply (physical as well as deposits). In other words: the Russian central bank could redeem all the RUB in circulation and on deposits with the USD, i.e. the RUB is entirely FX backed. Of course, I do not think this is going to happen, it just helps to put things into perspective.
A fully FX backed currency that pays 17% doesn’t sound like a bad investment to me…
(Disclosure: Long RUB and select Russian stocks and bonds)