Russian reserves fall as future funding commitments mount
Karen Kostanyan, Head of Russian Research at Merrill Lynch, is tracking the level of Russia’s fiscal reserves. They have come down from a peak of $597 Billion in August to less than $400 Billion this week, and she is keeping an eye out for what she calls the capitulation threshold.
“We see that level at $300 Billion dollars which is basically the reserve fund and also some foreign currency reserves which are going to be six months of imports recommended by the IMF because the reserve fund is probably going to be necessary next year to cover the impending budget deficit.”
Others, like Sergey Guriev, Head of the New Economic School, push the idea of covering that budget deficit with borrowed money, saying that, having cleared all sovereign debts in recent years, now is the high time for Russia to tap foreign markets for funding.
“Russia is a great debtor. Russia has paid off all its debts when oil prices were high and now, when oil prices are low, it will be able to borrow in the market because everybody knows once oil prices go up again Russia will repay.”
The idea is that once the price of oil recovers, Russia would repay its debts in full. But Merrill Lynch’s Kostanyan says Russia may be better off with lower oil prices, if it wants to move away from the boom-bust of commodities suppliers.
“Maybe in the long run it’s better for Russia that oil prices stay low so that we diversify away from a commodities based economy because otherwise the commodities cycle is going to hit us hard and hit us again and again.”
Commodities – namely oil -still provide 40 % of budget revenues through taxes and export duties, despite government efforts to diversify the economy away from its dependence on crude.