We must admit to having a feeling of “déjà vu all over again” as we watch the value of the Russian Rouble sink rapidly in the East, having lost roughly 50% of its value against the US Dollar over the past year; and as reports begin to appear of Russian banks seeing queues form of customers seeking to buy US Dollars in an attempt to preserve some of their wealth via a currency that for all its supposed faults is still the global hegemon.
And when one couples that with the idea being broached of the Duma passing legislation that would, in effect, make the holding and use of US Dollar cash illegal for almost all of the population, one begins to wonder whether the shocks of 1998 and 2008 are about to be repeated. It should not be forgotten that in 1998 the then government deliberately and explicitly defaulted on its domestic currency GKO obligations, while continuing to honour its external obligations such as MinFins and the like- something which is rare, even in the idiosyncratic and episodic world of sovereign default, and not the same as the “soft defaults” that occur in places such as Venezuela and Greece, to name a couple.
Of course, Russia is not the Soviet Union (although President Putin clearly has revanchist goals on Russia’s western Marches, and is probably causing apoplexy in Warsaw at present with his seeming defence of the infamous Molotov-Ribbentrop Non-aggression Pact and its Secret Protocol); and the fact that Russia’s major exports are largely US Dollar-denominated provides a significant fiscal hedge, as long as the prices of crude oil in particular do not decline further. Nevertheless, the Central Bank’s attempts to stem the Rouble’s collapse, in spite of raising rates and expending significant portions of its foreign exchange reserves, have largely proved fruitless, generating rising concern that some form of capital and exchange controls may have to be introduced to “stop the rot.” The fact that the so-called ceasefire in the eastern Ukraine is beginning to unravel simply adds to the sense of unease.
As if that were not enough, inflation is rising; the economy is close to, if not already in recession; and the effect of sanctions is increasing autarchic tendencies.
So, the question arises as to whether, in spite of Putin’s still very high “approval ratings” and seemingly unchallenged internal authority, the regime may be somewhat more “brittle” and vulnerable than market pricing on sovereign debt and for CDSs would lead one to believe; and whether there is now a higher probability of government actions that will have a material negative impact, not only on external investors and lenders, but also on those writing trade credit and political risk covers.
We at Awbury pay close attention to such developments around the world, because we believe that it is essential to update constantly our understanding and assessment of the risks in key markets, so that we can continue to underwrite and price the transactions that our multi-national client base brings to us; and maintain a robust relationship between risk and reward.
-The Awbury Team