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20 Mar, 2009 13:38

Upside in oil, gold and Rouble for Russia after U.S. Fed saps dollar

Upside in oil, gold and Rouble for Russia after U.S. Fed saps dollar

The announcement by the U.S. Federal reserve that it will spend up to $300 Billion buying U.S. treasuries will take a lot of pressure off the Russian Rouble, and possibly the Russian budget.

As the Duma sits down to mull over the vastly altered circumstances in which the revised budget is being put to them – with a deficit of 7.4% of GDP and anti crisis spending hacked by 30% – the announcement by the U.S. Federal Reserve that it will start spending $300 billion on U.S. Treasuries, and double its mortgage debt purchases to $1.45 Trillion – under a policy of ‘quantitative easing’ or the effective monetization of significant amounts of debt – means that all of a sudden the backdrop to the Russian budget may not be as bleak as it seems.

The effects of the announcement were almost instantaneous. Within moments of the well forewarned announcement, shocked traders were watching the gold price jump from $890 to above $940 per ounce, doubts about whether oil could push to $50/bbl disappeared, and the U.S. dollar stepped onto a lower rung. That’s in addition to the stock markets getting a further jolt which pushed their recent rally a little further, and as the business media and internet warmed up with warnings about the possibility of hyperinflation and a collapse of the U.S. dollar.

In one way it’s an act of desperation. With its interest rate gun now firing blanks the Fed needed to pull out something else from its bag of tricks to give its economy a pep. But although Ben Bernanke had clearly announced the Fed was planning on doing this, the actual announcement that the policy is teeing off, means that a big club is out of the bag. No more stuffing around is what the Fed is saying. The economy will grow no matter what, and we’ll deal with the consequences later, is what its adding.

The big immediate effect was on the dollar. It has been riding high on a safe haven status as global investors shunned riskier currencies and economies – a sentiment helped by the general thought that if real financial meltdown does occur, then it is dollars that are going to be needed to handle all of the CDS and CDO transactions which are feared. Add to this the recent moves by almost everyone else to weaken their currencies – culminating in last weeks moves by the Swiss central bank to weaken the Franc through open market operations: something not seen in a generation.

The Fed’s announcement came despite recently expressed reservations from China about the value of its holding in U.S. treasuries and a range of other bonds, and as trade data shows that U.S. exports could certainly do with an easing dollar if the world largest creditor is to try and trade its way out of its current account issues. The net effect, within a couple of days of the Fed’s announcement, has been to push the greenback lower against nearly every other major currency.

A range of effects stem from the move. Starting close to home one assumes that the Central Bank of Russia is less likely to find itself having to defend its line in the sand of 41 Roubles to the Euro/dollar basket (which translates roughly to a U.S. dollar/Rouble rate of 1:36). The upside of this is that Russian companies, banks and government agencies can get out of the worrying about hedging the effects of further Rouble devaluation and into the business of some active investment. The Russian Government can likewise rest a little easier with the thought that should it find itself in the position of having to add further liquidity to the finance system the funds it adds are less likely to be used speculatively against the currency. The Rouble dollar trade is no longer a one way bet.

Beyond the lines in the currency exchanges, there is a further upside for Russia. That’s in the world of commodities which are almost all priced in U.S. dollars and can all be expected to lift to some degree if the U.S. dollar eases further. The sudden moves in gold and oil during the week were a case in point. As a major energy and commodities producer Russia is now seeing global prices rising in U.S. dollar terms, or at least showing signs of turning around. If that sounds a tad optimistic then at least consider that they are manifestly not any longer in free fall.

With the revised Russian budget being based on a crude oil price of $41/bbl, the move by the U.S. Fed makes the possibility that oil prices could average significantly higher than this over the life of the budget, significantly higher. From there, any differential between the baseline ($41/bbl) and the actuality (currently above $50/bbl) helps provide a further basis for the Russian government to build in further measures down the track, should it need to do so.

Away from the Government any move higher in U.S. dollar terms by Russia’s exports means that there is less likelihood of government involvement even being needed. Projects are more viable, funding more easily gained, job losses less likely. Normal business activity becomes more normal, companies and then people start spending once again.

It is still a long way off, no doubt about it, and there are for sure a range of other factors locally to come into play such as inflation (rampant here in Russia, but almost longed for elsewhere) and microeconomic reform. There is still the possibility that major corporate collapses elsewhere could see another sudden surge in the value of the U.S. dollar, and of itself the Fed decision does nothing to address the global economic imbalances, lack of regulation, and the void that seems to have engulfed the worlds major banks and their balance sheets.

But it is one step closer to something we may see as normality, and lays the basis for a better, and possibly improving, address of the real economy. There is an upside for Russia in what the U.S. Federal Reserve has done.

James Blake: RT Business