Amid Gloom, Russian Reserves Post Record Rise - 2008

Amid Gloom, Russian Reserves Post Record Rise

December, 2008

Russia's gold and foreign exchange reserves rose by a record $15.4 billion in the latest week thanks to a stronger euro and a rise in commercial banks' foreign currency deposits. The reserves, the world's third largest, rose to $450.8 billion on December 19 from $435.4 billion in the previous week, central bank data showed, even though the central bank spent an estimated $7 billion to support the rouble.

The reserves have shrunk by a quarter from early August peaks, dented by the central bank's defense of the rouble. Some of the money is also being used to help Russian companies to refinance their foreign debt. The rouble has come under pressure as Russia's key export earner, crude oil, falls in price. Russia has run seven small devaluations of the rouble since oil prices began to slide. The currency is now nearly 16 percent below August's historic peaks. Oil, Russia's main export, has lost 76 percent since July peak. The euro, which accounts for about 45 percent of Russia's gold and forex reserves, strengthened by about 4 percent against the dollar during the week between December 12 and December 19. A stronger euro boosts the dollar value of reserves. First Deputy Chairman of the central bank Alexei Ulyukayev said the reserves rose also due to an increase in foreign currency deposits in the central bank.

Many Russian banks took long positions in foreign currencies in anticipation of the rouble's devaluation, contributing to overall capital flight and prompting a backlash from President Dmitry Medvedev and Prime Minister Vladimir Putin. Russian authorities told commercial banks not to increase their foreign currency positions or risk losing their access to the central bank's liquidity through collateral-free auctions. Instead, the central bank gave banks a possibility to park their foreign currency in interest-free accounts with the central bank. Ulyukayev said "several billion" were currently held in these accounts. Commercial banks' accounts in the central bank are matched by corresponding foreign currency positions in the central bank's assets, which count as part of the international reserves.

Russia will also tap its $132.6 billion Reserve Fund, which serves as a safety cushion for the budget and is set to stay at around 10 percent of Russia's GDP, to plug holes in the next year's budget. The Kremlin's aide on economy Arkady Dvorkovich told Vesti 24 news channel on Thursday Russia will run a deficit of 3-4 percent of gross domestic product (GDP) in 2009 if global economic growth resumes in the second half of the year. Dvorkovich said that in case the global economy will be contracting throughout 2009, the deficit will not exceed 5 percent of GDP. Russia expects the economy to grow by 2.4 percent in 2009 if the average price of oil stays at $50 per barrel.


In related news:

Russian-Armenian Ties ‘Unaffected By Economic Crisis’

Armenia’s economic ties with Russia have so far been largely unaffected by the global economic crisis, a Russian official said on Thursday, reporting a nearly 20 percent increase in bilateral trade registered in the first ten months of this year. According to government statistics cited by Aleksandr Zaytsev, Russia’s trade representative to Armenia, the volume of that trade totaled about $860 million during this period. Armenian and Russian officials repeatedly said earlier that it will pass the $1 billion mark in 2008. Russia thus remains Armenia’s number one trading partner, accounting for almost 20 percent of its external trade turnover in January-October 2008. Zaytsev also announced that Russian investments in the Armenian economy nearly doubled to $570 million in January-September 2008.

The bulk of those investments were apparently channeled into Armenia’s energy and telecommunication sectors dominated by large Russian companies. “The financial and economic crisis has not seriously affected [Russian-Armenian commercial ties,]” Zaytsev told a news conference in Yerevan. “It will certainly somehow affect them later on.” Russia has seen its stock markets collapse since the outbreak of the crisis in September and the resulting sharp drop in international prices of oil, a key Russian export. The downturn’s impact on the Armenian economy has been far milder so far. Still, economists fear that the economy will be hit hard by a possible reduction in large-scale cash remittances sent home by hundreds of thousands of Armenians working abroad. Russia is the main source of those remittances.

Economic issues were reportedly high on the agenda of Russian President Dmitry Medvedev’s October visit to Yerevan. “Our current economic relations are impressive but tend to lag behind our political relations,” Medvedev’s Armenian counterpart, Serzh Sarkisian said after the talks, calling for the launch “large-scale joint projects.” Sarkisian said he and Medvedev discussed potential Russian involvement in two such projects: the planned construction of a new Armenian nuclear plant and a railway linking Armenia to neighboring Iran. Armenia’s rail network, recently renamed the South Caucasus Railway (SCR), is managed by Russia’s state- run rail company, RZD. The Armenian authorities have signaled their discontent with SCR’s Russian management of late. A series of reports in the Armenian press accused the Russians of failing to honor their investment commitments. They also alleged that the SCR’s chief executive, Aleksandr Kuznetsov, has misappropriated company funds.

Zaytsev categorically denied the allegations. He said RZD has invested $108 million in Armenia since taking over its rail network’s management in January. Under the terms of its management contract with the Armenian government, RZD is to invest $230 million in the network during the first five years of operations and another $240 million in the following years. Zaytsev also criticized Armenia’s State Commission for the Protection of Economic Competition (SCPEC) for fining the SCR 500,000 drams ($1,600) on Wednesday for its failure to provide the regulatory body with a detailed explanation of its tariff policy. The SPCEC demanded the information last month in connection with its ongoing inquiry into the legality of a recent sharp increase in the cost of cargo shipments and other services provided by the railway. The anti-trust inquiry was demanded by one of Armenia’s largest fuel importers owned by government-connected businessmen.


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