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Crouching sanctions, hidden revenues

by Lev Igorevich

FRIDAY, DECEMBER 19, 2014

THE VINEYARD OF THE SAKER

Dollars for borsch

There is a lot of speculation about the economic health of Russia in the light of tougher sanctions, falling oil prices and tumbling ruble. Concerns are raised whether Russia can afford it’s existence. However, those concerns are paper thin and are presented in more of a mocking spirit, because in most prediction acrobatics, actual revenues of Russian state are not considered at all. Many sources, in their predictions for Russian economy, are repeating the same mistake over and over again. Roughly speaking – assesments are made under the assumption that Russians pay dollars for their borsch. In reality, Russia sells borsch for dollars. This is important point to consider, because Russia pays it’s public sector expenditures (education, healthcare, pensions, police, army etc) in rubles!

As we all knew (those who didn’t got it stamped in the face this year thanks to the good will of liberal media), Russian revenues are based on natural resources. Sales are conducted in FX (except for special agreements, some of which are still pending). So let’s take a look how the purse of Russian state is being filled.

For the purpose of this article, rough numbers were taken from Nasdaq WTI chart for oil and XE USD/RUB chart for FX. Example will be based on average gas price for Germany in 2013, which was $366 (according to Bloomberg).

Oil Situation

As far as Russian Treasury is concerned, income from oil industry is just fine and is probably exceeding early 2014 estimates for next years budget. Even at tumbling oil prices, falling ruble is compensating more than enough – revenue rose roghly 12% year-over-year.

Year Month WTI Crude $ USD/RUB RUB revenue
2013 1Y AVG 97 33 3201
2013 November 94 33 3102
2014 February 103 36 3708
2014 May 103 35 3605
2014 August 95 37 3515
2014 November 75 46 3450
2014 December 60 60 3600
Crisis Average 88 41 3 497

Gas situation

Let’s take a look at this years picture using the same ruble prices from the oil chart. It is easy to see that ruble revenue almost doubled by the end of the year and avaregad 31% more in year-over-year income.

Year Month Gas3$ USD/RUB RUB revenue
2013 1Y AVG 366 33 12078
2014 February 366 35 12810
2014 May 366 35 12810
2014 August 366 37 13542
2014 November 366 46 16836
2014 December 366 60 21960
2014 1Y AVG 366 43 15 592

Surprise, n***a!

On paper, Russia will have good fiscal numbers and a solid budget for 2015. This of course is just a cover image. Russia plans major investments for 2015 and onwards (with developments in the west, Russia needs “2020” to happen much quicker) and is most likely to tap it’s floating currency mechanisms for issuing more rubles for those investments. I doubt that Russia will waste FX by selling them for rubles right off the bat if they can print the money against fresh FX holdings. The “big throw” will be reserved for later as we all know what happens to countries that dump dollar overnight. Last thing Russia (and China, too) needs right now is another color/umbrella revolution being sped up. Equally importantly, one must not forget that Russian and Chinese financial systems combined hold trillions of US treasuries (it’s insane to hold cash as bank deposits are guaranteed up to $250K, treasuries have no limit against bankruptcy) which they wouldn’t want to depreceate before major swap and secure measueres are in place. So unless the west comes in with guns, don’t hold your breath for international ruble just yet. Instead, what Russia needs right now is a weak ruble that will force to dump imports and start thinking about substitution and better yet realizing Russias natural potential. The plan is to force Russians to think about long-term local business, not just quick-buck consumerism. Russia must give a crude awakening slap to the late and advantage to the early wakers amids decreasing foreign profits. Make the business to step up with own goods and technologies, initiate a cross-sectoral build up and stop companies syphoning money off-shore where it gets pocketed by western “asset managers”.

Fate’s irony or enjoy your bath

Ironically, weak ruble will also punish EU for doing dirty work for the US. Now it’s for everyone to see that US waves the stick while the EU pays the price. Weak ruble will decrease tourism from Russia and exports to Russia. EU’s agricultural sector is already sensing light, but increasing pain. Tech industry shall follow if Russia is to prolong the embargo and weak ruble combo. Yes, low ruble means less purchasing power abroad. Yet it also means competitive advantage for Russian goods in foreign markets and thus increased selling power – a signal for future development. Mercedes-Benz has announced that it plans to build several plants in Russia. Volvo, Renault-Nissan and others are already there. If this will materiaize – hello jobs for Russians and goodbye long awaited economic recovery for EU! Germany will be punished for it’s ambition to monopolize the distribution of Russian gas by attempting to take Ukraine into its fold through post-coup privatization (now just a crushed dream), while actually opening Pandora’s Box for US to exploit. Get ready for a triple whammy (must be some excellent German engineering)! Firstly – US took Ukraine over and kicked Germany over the fence with Merkel compliantly shutting up. Secondly, EU’s sales to Russia were decreasing and with tumbling ruble are guaranteed to decrease even more. South America, Turkey, India and China will be more than happy to fill the void. And thirdly, how’s prospect of Turkey becoming major regional gas hub for you? Saxon greed has met its borders within the mauling paws of the bear while oldest nations of the world are economically invited to watch the show.

Crackdown on Brokeback Mountain

During the 18.12.2014 press Q&A session, when asked if he has confidence in the elites surrounding him, Putin replied that the biggest confidence stems from the overwhelming support of the Russian people. That was after some quite dangerous fifth column definition gymnastics and attempts to break Putins confidence took place. Russia will use current economic situation not only to punish it’s western “partners”, but also will have the perfect excuse, once comfortable, to clean up its fifth column in the government and banking. While low ruble will add pressure to European economy and steep central bank rate will stop predatory ruble trading, Putin will have a card up his sleeve to unleash the “wrath of Russian people” onto the traitors in the establishment responsible for “susceptibility to western sanctions”, “unexpected currency dive” and “expensive financing”. Switching staff by popular demand will remove a lot of questions internally and give that extra legitimacy externally. “The Moor has done his work, the Moor may go” at its finest. However, lowering the funds rate at the central bank will probably not give any rise to ruble (because of foreign perception, not economic reality), but as previously laid out, that might be desireable all along – easier financing and boosted competitivness is what the business always needs.