The journal Business New Europe (“BNE”) has written an interesting article discussing the deleveraging the Russian economy has undertaken in the two years since sanctions were imposed.
It notes that Russia has succeeded in radically reducing the level of its companies’ external debt without this resulting in the credit crunch that was widely predicted. Its exact words are:
“As the ruble crashed at the end of 2014 and Western sanctions hit some of Russia’s largest and most indebted firms, some analysts predicted the country was headed toward a credit crunch. In fact, Russia’s total stock of foreign debt actually fell by nearly 30% over the subsequent two years.”
For a classic example of an article which did predict that Russia was heading for a credit crunch see this scaremongering piece from January 2015 by The Daily Telegraph’s Ambrose Evans-Pritchard.
What is really extraordinary about all this is why anyone supposed Russia was at risk of a credit crunch at all.
I should say that I have form here because in a lengthy article published on 12th January 2015 I discussed – in the context of the downgrading of Russia’s credit rating – the threat of Russia experiencing a credit crunch and said it did not exist
The claim that Russia was heading towards a credit crunch was founded on a wholly wrong – indeed absurd – assumption that the only foreign currency available in Russia to pay foreign debt was that held in reserve by the Central Bank and that because of Western sanctions no other money was available.
What seems to have happened was that people added together the total amount of foreign debt owed by Russian companies (around $750 billion in mid 2014), found it was more than the amount of foreign currency held in the Central Bank’s reserves (around $510 billion in mid 2014), and assumed that because of the fall in the oil price, the rouble’s devaluation and the sanctions that meant Russia would soon run out of money.
To add to the hysteria – and the gloating – bogus claims were made by individuals like the Swedish economist Anders Aslund – effortlessly demolished by the analyst Jon Hellevig – that the Central Bank’s “real” reserves were less – or just half – what the Russian authorities were saying they were.
In reality the truth was the exact opposite. Not only were the Central Bank’s reserves every bit as large as the Central Bank was saying they were but a significant – though unknown – part of Russia’s foreign debt was actually nominal book debt held offshore by Russian companies that could be easily rolled over.
Russian companies – especially Russian banks – did indeed need help from the Central Bank to tide them over their initial payment difficulties. It was partly the Central Bank’s delay in providing this help – as well as the delay in raising interest rates and the loan to Rosneft discussed in the BNE article – that caused the rouble to crash in December 2014.
However there have always been more than enough foreign currency and foreign assets held by Russian banks and companies and by the Russian authorities to ensure that Russian banks and companies – with help from the Central Bank – could meet their foreign currency debt obligations. Together with the continued cash flow from the country’s export revenues this has proved more than enough to enable the deleveraging to take place without – as BNE notes – apparent strain.
That the situation was never dangerous – or even critical – is shown by the limited extent of the help that the Central Bank was in the end required to give. Central Bank reserves did fall but only to a still very healthy $350 billion – very far from crisis levels or any possible danger point. They have recently been edging back up again towards $400 billion despite oil prices remaining below $50 a barrel in the year to date.
This whole story of the Russian credit crunch that wasn’t is in fact a textbook example of how Western commentary gets the Russian economy repeatedly wrong.
A simple analysis of the facts – such as the one I undertook in January 2015 – would have shown that the danger of a credit crunch did not exist. Yet instead of undertaking such an analysis Western commentators preferred to indulge themselves in farfetched and wildly improbable catastrophe scenarios that would have been derided if made about any other economy.
The Russian economy has its strengths and weaknesses as all economies do. There is however no sense when reporting about it in talking only of its weaknesses – and then exaggerating them beyond reason.
That is not commentary but (bad) propaganda, which can only lead to the sort of reporting errors of which the scaremongering over the credit crunch that wasn’t is just one example.