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 At first glance the stockpile - $472 billion of hard currency
reserves and nearly $1.5 trillion of assets overall - is more than
enough to keep banks, firms and the economy going as the West tries
to punish Moscow over the Ukrainian crisis.
But this ignores the psychological effect. Russia burned through
$200 billion in six months during its last major crisis in 2008-09;
if reserves were to start draining away again, panic could quickly
set in among people inside and outside the country, accelerating a
flight of capital.
The United States and European Union first imposed sanctions after
Russia annexed Crimea from Ukraine in March and have since tightened
them. This week the EU froze five state-controlled banks out of its
capital markets in measures targeted at Russia's financial, military
and energy industries.
While Russia is on the verge of recession, analysts and investors
generally agree with officials there that its finances can withstand
a tightening of the screws for now.
"They have reserves of almost half a trillion dollars. Given the
minimal refinancing needs of the sanctioned banks, they're in a
reasonably comfortable position," said Brett Diment, head of
emerging markets funds for Aberdeen Asset Management.
Those needs are in the range of $7-8 billion in the next year and
the central bank has said it will support any domestic bank hit by
the sanctions.
Analysts at Morgan Stanley calculate the reserves, which are the
fifth largest in the world, could cover all maturing external debt
three times over and imports for around 17 months. That's much
longer than the six months threshold, below which alarm bells
usually start ringing with emerging economies.
Reuters calculations based on central bank data show big Russian
banks must refinance around $50 billion of debt this year and next,
while companies' needs are closer to $100 billion.
This seems manageable, but many factors are not clear-cut. About a
third of the reserves are in two oil wealth funds earmarked for
countering drops in international oil prices rather then funding
banks or firms. Roughly $40 billion is in gold, while $13 billion is
parked at the IMF, official data show.
Russia also needs to keep income flowing from energy exports. While
the EU sanctions target European exports of equipment to the Russian
oil industry, those for gas production are exempt. This underlines a
basic interdependence: Europe needs Russian gas, just as Russia
needs the money it earns.
WAKING THE DRAGON
Nevertheless, most Russia experts believe the sanctions are likely
to get tougher in the next few months. Neither side appears ready to
back down in the crisis, which deepened after a Malaysian airliner
was brought down over territory in eastern Ukraine controlled by
pro-Moscow rebels last month.
At the very least, the number of banks and firms needing help as
they are hit by sanctions is likely to grow.
One of the biggest unknowns is how many foreign investors and
Russians will move their money out of the country if relations with
the West, and the economy, sour further.
Russia was badly hurt during the global financial crisis six years
ago, with capital fleeing abroad and the central bank burning
rapidly through its reserves as it tried to slow a one-third drop in
the ruble's value against the dollar.
Recent central bank data have shown Russians again ditching the
rouble for dollars and other foreign assets, at the fastest pace in
more than four years.
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Around $75 billion poured out of Russia in the first six months of
this year and Morgan Stanley expects a similar amount will leave in
the second half. One economist said the question was whether "the
sleeping dragon of demand for dollars and other foreign assets would
be woken up again", adding that it probably would be to a certain
extent.
While the central bank managed the ruble's slide during the last
economic crisis, it might react differently if the current
geopolitical confrontation worsens.
Timothy Ash, head emerging markets strategist at Standard Bank in
London, said that the central bank may try to hold the line if
capital flight accelerates.
"Once that starts, reserves would melt pretty quickly, and I think
that unlike in 2008/2009 the central bank would be loath to let the
currency weaken amid geopolitical risks," he said.
The authorities could reimpose capital controls, but earlier in the
crisis the central bank made clear it opposed such action, which
would reduce Russians' demand for foreign currency but also raise
borrowing costs for corporations.
While it is difficult to judge what everyday Russians would do, the
exodus of investors may not turn into the stampede some fear.
Foreigners hold almost $200 billion of Russian equities, according
to the central bank. But with many emerging market funds benchmarked
to indexes such as MSCI's, where Russian stocks account for around 5
percent, it means they cannot pull all their money out.
PLUS POINT
Another plus point is that with $1.47 trillion in total assets -
reserves plus those held both at home and abroad by Russians -
versus $1.34 trillion of liabilities, Moscow's finances are in the
black.
The biggest difference between now and the 2008-09 crisis is that
this time the oil price, which brings in much of Russia's wealth, is
not suffering from a global financial crisis.
However, Moody's rating agency warned on Thursday that the current
turbulence could leave Russia exposed if oil prices were to fall
sharply after all. "If capital outflows continued at a similar pace
as in the first half of 2014 because of the Ukraine conflict and
sanctions, the level of reserves with which Russia would face an oil
shock would be significantly lower than in 2008," Moody's said in a
report.
But for now, while the situation remains unpredictable, the better
global economic environment than in 2008-09 should mean Russia's
finances deteriorate at least at a slower pace.
"If the corporates and banks lose access (to capital markets) you
will have to keep an eye on the currency reserves because they would
have to rely on the Russian central bank to provide the dollars to
fund their external debt," said Viktor Szabo, a Russian specialist
that works alongside Diment at Aberdeen Asset Management. "But it is
not a short-term issue, it is more of a 2-3 year horizon."
(Writing by Marc Jones; editing by David Stamp)
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