Russian Banking Bailout Behind Change In Foreign Policy?
We've talked repeatedly about emerging market financial systems being cobbled together with toothpicks. In other words, if you think the mess in the U.S. is fun, wait a while because it's going to get a whole lot more interesting. It has only been a decade since Russia had a major financial crisis and now Wall Street is fawning over the country. A few years ago we mentioned the potential for crisis in the Russian banking system. We followed up earlier this year with a post that Russia could be one of the next problems in the world. Soon thereafter were the following comments from the Russian central banking chairman:
"Russian Central Bank deputy chairman Alexey Ulyukaev, speaking at an annual meeting with bankers in a Moscow suburb yesterday, acknowledged for the first time that there is a substantial crisis of liquidity in the Russian banking system. He stated that the Central Bank will shift its priorities away from inflation control to concentrate more on stability in the Russian banking system."
People are constantly pointing to emerging market foreign exchange reserves as proof of their economic health. The concept of healthy emerging markets due to foreign exchange reserves is completely laughable. That is, if the situation weren't so concerning. One of the outcomes I believe has a very high probability of arising out of this cycle is that many emerging markets will be left using accumulated foreign exchange reserves to deal with their own crises. Thus leaving them broke and destitute. Again. If this does occur, the implications could be very ominous on many levels. Not just economic. So, are we already seeing the first instance of a country needing to use its accumulated reserves in the case of Russia?
I read a while ago that Julian Robertson (an investing legend) has made significant bets that the Chinese will not buy any more U.S. Treasuries if the U.S. government continues to spend with reckless abandon. And, that will force ten year Treasury bond rates higher in the U.S. I disagree with Robertson's logic. As I have written, there is no plausible argument that China is going to overtly attempt harm to the economy most responsible for its exports and growing wealth. Or, as I have written, more appropriately their perceived wealth. There needs to be an impetus for a change in policy to occur on either side. China isn't going to upset the U.S. relationship that literally keeps the communist government in power by providing jobs and social stability. China and the U.S. are benefiting from an unstable and transitory equilibrium. I wrote elsewhere back in 2006 that I viewed this relationship as a possible Nash Equilibrium. This will not be interrupted as long as both parties are achieving perceived benefits that outweigh any costs of change. The only question remains what will occur first to break the equilibrium.
I do agree with the potential for an outcome similar to Robertson's position. But under completely different circumstances. In other words, as China's financial and economic problems become exposed, and they will, China will likely need dollars to prop up their financial system and their economy. Exactly during a time when dollar supply will likely start diminishing. And possibly significantly. (Dollar strength hasn't developed yet but rather than this pointing to my analysis being faulty, the dollar cycle appears to be in slow motion and hasn't run its course. Fundamentals are still lining up for what I believe will be a dollar rally regardless of the emotions of dollar bears, fears of hyperinflation by many or any government policy responses.) Where will the Chinese government get these dollars? Why yes indeed. Their accumulated U.S. Treasury reserves. What would that do to the bond market? Likely spike Treasury rates as Robertson predicts but under a completely different scenario.
I bring this up as background because I find it ironic and perplexing that Russia has made a very significant change in their foreign policy over the last few months. And, for no reason. A policy they have steadfastly refused to change. In the first quarter Russia announced they will support United Nations sanctions on Iran if they do not stop uranium enrichment. Russia has resisted pressure for years on this topic for what I believe are five or so primary reasons. 1) They are profiting tremendously by supplying Iran with knowledge and product for their nuclear program. 2) Russia has a significant population sympathetic to Iran. 3) Russia and Iran are relative geographic neighbors and they seek positive influence in the region. 4) Russia feels slighted in the world of international politics and is looking to re-exert its eminence as all political powers do. 5) Russia achieves this counter weight by taking an opposing position to the U.S. in an international event. An event that doesn't threaten its economic ties with the West.
So, what would change Russia's position? A position they have benefited from greatly? Russia's banking system is under severe duress and their banking officials have expressed concerns about foreign exchange reserves possibly not being sufficient to deal with their crisis let alone to support economic expansion. In other words, Russian authorities have expressed a need for access to foreign capital. Historically, we know it was lack of access to capital and foreign exchange reserves that caused the demise of the Soviet Union. Is history repeating itself? Has the U.S., in some nontransparent act, given Russia access to capital in exchange for a u-turn on Iran? Is there any other plausible explanation? I've been monitoring Russia for many years and comments about the banking crisis out of Russia have gone silent over the last few months. In fact, the only public comments have subsequently been that a Russian official has said they now are confident the banking crisis is now contained. Huh? It seems obvious to me that something has changed. And that something is not being reported by the media either in Russia or outside of Russia. Unless, that is, the Russian banking bomb is getting larger and officials are simply partaking in U.S.-style happy talk in an effort to maintain confidence.
"Russian Central Bank deputy chairman Alexey Ulyukaev, speaking at an annual meeting with bankers in a Moscow suburb yesterday, acknowledged for the first time that there is a substantial crisis of liquidity in the Russian banking system. He stated that the Central Bank will shift its priorities away from inflation control to concentrate more on stability in the Russian banking system."
People are constantly pointing to emerging market foreign exchange reserves as proof of their economic health. The concept of healthy emerging markets due to foreign exchange reserves is completely laughable. That is, if the situation weren't so concerning. One of the outcomes I believe has a very high probability of arising out of this cycle is that many emerging markets will be left using accumulated foreign exchange reserves to deal with their own crises. Thus leaving them broke and destitute. Again. If this does occur, the implications could be very ominous on many levels. Not just economic. So, are we already seeing the first instance of a country needing to use its accumulated reserves in the case of Russia?
I read a while ago that Julian Robertson (an investing legend) has made significant bets that the Chinese will not buy any more U.S. Treasuries if the U.S. government continues to spend with reckless abandon. And, that will force ten year Treasury bond rates higher in the U.S. I disagree with Robertson's logic. As I have written, there is no plausible argument that China is going to overtly attempt harm to the economy most responsible for its exports and growing wealth. Or, as I have written, more appropriately their perceived wealth. There needs to be an impetus for a change in policy to occur on either side. China isn't going to upset the U.S. relationship that literally keeps the communist government in power by providing jobs and social stability. China and the U.S. are benefiting from an unstable and transitory equilibrium. I wrote elsewhere back in 2006 that I viewed this relationship as a possible Nash Equilibrium. This will not be interrupted as long as both parties are achieving perceived benefits that outweigh any costs of change. The only question remains what will occur first to break the equilibrium.
I do agree with the potential for an outcome similar to Robertson's position. But under completely different circumstances. In other words, as China's financial and economic problems become exposed, and they will, China will likely need dollars to prop up their financial system and their economy. Exactly during a time when dollar supply will likely start diminishing. And possibly significantly. (Dollar strength hasn't developed yet but rather than this pointing to my analysis being faulty, the dollar cycle appears to be in slow motion and hasn't run its course. Fundamentals are still lining up for what I believe will be a dollar rally regardless of the emotions of dollar bears, fears of hyperinflation by many or any government policy responses.) Where will the Chinese government get these dollars? Why yes indeed. Their accumulated U.S. Treasury reserves. What would that do to the bond market? Likely spike Treasury rates as Robertson predicts but under a completely different scenario.
I bring this up as background because I find it ironic and perplexing that Russia has made a very significant change in their foreign policy over the last few months. And, for no reason. A policy they have steadfastly refused to change. In the first quarter Russia announced they will support United Nations sanctions on Iran if they do not stop uranium enrichment. Russia has resisted pressure for years on this topic for what I believe are five or so primary reasons. 1) They are profiting tremendously by supplying Iran with knowledge and product for their nuclear program. 2) Russia has a significant population sympathetic to Iran. 3) Russia and Iran are relative geographic neighbors and they seek positive influence in the region. 4) Russia feels slighted in the world of international politics and is looking to re-exert its eminence as all political powers do. 5) Russia achieves this counter weight by taking an opposing position to the U.S. in an international event. An event that doesn't threaten its economic ties with the West.
So, what would change Russia's position? A position they have benefited from greatly? Russia's banking system is under severe duress and their banking officials have expressed concerns about foreign exchange reserves possibly not being sufficient to deal with their crisis let alone to support economic expansion. In other words, Russian authorities have expressed a need for access to foreign capital. Historically, we know it was lack of access to capital and foreign exchange reserves that caused the demise of the Soviet Union. Is history repeating itself? Has the U.S., in some nontransparent act, given Russia access to capital in exchange for a u-turn on Iran? Is there any other plausible explanation? I've been monitoring Russia for many years and comments about the banking crisis out of Russia have gone silent over the last few months. In fact, the only public comments have subsequently been that a Russian official has said they now are confident the banking crisis is now contained. Huh? It seems obvious to me that something has changed. And that something is not being reported by the media either in Russia or outside of Russia. Unless, that is, the Russian banking bomb is getting larger and officials are simply partaking in U.S.-style happy talk in an effort to maintain confidence.
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