U.S. debt and Russia’s reserves
RT: At what stage should Russia start worrying?
JN:"I don’t think so, I think that no U.S. Treasury Secretary will allow the U.S. to default on an external obligation.So if the debt ceiling doesn’t get raised, then what will happen is that the U.S. will skip some domestic payments.You will see a default, if you want to use that word, on, perhaps, social security payments, pension payments to Americans, or perhaps a shutdown of parts of the Federal government, but it will stay constant on its external debt obligations."
RT: So T-Bills will see their coupons being paid?
JN:"Yes you will see coupons being paid.However, if the deal that is done doesn’t satisfy the credit ratings agencies, there is a chance of a ratings downgrade, and that may have an impact on the Treasury Bill market, it may have an impact on the price of T-Bills, and that may have an impact on the value of Russia’s international reserves.We don’t think it will have much of an impact because the depth of the U.S. T-Bill market is so deep.It’s the core source of funding of low risk assets for so many companies, that we don’t expect it to significantly move the price.But there is a risk it would."
RT: It seems that S&P and Moody’s have compiled a list of requirements which are pretty harsh on the U.S. and they are acting a bit like a government body, like the IMF, like an international body, like the IMF or the World Bank.Wouldn’t you say that is an interesting shift of role?
JN:"I think it is a good question, the role of credit rating agencies, and perhaps there is a good case, and certainly the European Union and Russia have raised this issue, whether there is a good case for some other ratings agencies or maybe some other body to make these assessments.But at the moment they are the people who do it, the people who have the credibility in the markets – even if they have made some bad calls in the past."
RT: If there is a downgrade for U.S. debt should Russia start changing the structure of its international reserves then?
JN:"I would take that question in two parts. I would think that for the central bank reserves the main thing you want is liquidity, and the U.S. T-Bill market is the most liquid market in the world.So probably you don’t want to change your composition on your central bank reserves side.But for your oil fund side assets, I think that Russia wants to invest in order to get a decent low risk return, and there is a very strong case there I think for the diversification, not just for the bonds of other countries, as has already been done, but also into equities and other asset classes.I believe that is under consideration at the moment."
RT: So Russia is actually considering doing that, then?
JN:"It is considering moving he management of the oil fund assets, to be separate from the management of the central bank assets, because you have got different objectives for the two sets of reserves."
RT: what do you think is more important right now – that by August 2 we see the debt ceiling be raised, or that the United States start tightening the belt on spending?
JN: "You need both.Obviously they have to raise the debt ceiling, but it wouldn’t be good for Russia, or for the rest of the world if the U.S. tightened fiscal policy too sharply too soon.It would hit demand, it would hit the oil price, it would hit growth.What you need is a medium term plan for debt reduction, including action on taxes and action on entitlements like health care."
RT: Do you think they will actually make it on time with some kind of resolution?
JN:"Maybe, maybe not.Once, in 1996, they failed to reach agreement and the federal government shut down non-essential services.That could happen again I guess, but sometimes a crisis concentrates minds and may get people over the hump to agreement."