Russia: Capital Controls?

Pivotfarm's picture

The markets are speculating that Vladimir Putin will have to set up some form of capital control in order to stem the flight of capital from his country. It was already happening before the crisis in Ukraine and the annexation of Crimea. But, now it is set to get worse and an estimated $70 billion is the figure that is being mentioned. That is far higher than had previously been expected.

The G7 suspended Russia from the G8 and is considering complete expulsion (on the say-so of the UK’s David Cameron) from the group of nations (Canada, France, Germany, Italy, Japan, UK, USA), during aMarch 24th 2014 special summit in The Hague. That’s all despite the fact that Russian media is now reporting that the G7 suspended themselves and Russia is left in the G8 on its own. It’s a little like the British that had headlines running that shock, horror, the ‘Continent was cut off from the British Isles by thick fog’. All depends where you believe you are. The Russians are at the center of their universe, obviously. Russia was part of the G8 between 1998 and 2014.

Russian Foreign Minister Sergei Lavrov stated: “If our Western partners believe the format has exhausted itself, we don’t cling to this format.”

So, what does Putin have to lose now? The ground has been prepared for a war in which Putin has nothing less to lose than his own power or ego being jolted a little. If he sits back and does nothing now that the G8 has become the G7 and Russia has been excluded (from one of the very few moments that the West actually communicates with Russia), then he will suffer the public consequences and humiliation of the Western world.

The West believes that is can draw a line under the annexation of Crimea, that it should tell Putin to stop there and all will be accepted as it is. But, Putin’s point is that Russia has been humiliated for decades by the West. The West has constantly treated the Russian Federation as a backward, Soviet-era country in which the people drank vodka all day and ate pelminis (that’s when the state was able to hand them out after queuing for three hours to get a slice of bread at a state shop). There might be many drawbacks to Russia where the people don’t quite do things the way of the Western world. Yes, they have lack of freedom of the press and yes there is an omnipresent state and a dictatorial leader. Although, the sole difference is the fact that Russia doesn’t pretend to be magnanimous and caring for anything but international power. The difference is that Western leaders do pretend (sometimes).

By taking away the privilege (if we can call it that) of sitting around a table with the other members of the G8, this will only exacerbate Putin’s feeling of humiliation. He will not stand for it. He will not accept it and he is so far in now that he cannot back down. The West is willing to wound Russia, but fears striking them since they are wary of the volatility of Putin as leader of a country with a damaged ego. Why at the present time, in the present predicament of the financial crisis with Greece in debt for generations, the French failing to do anything of any economic worth and the British threatening to leave the EU, would you wish for one moment to expand it by adding Ukraine into the already-failing union? Doing so, could have only had one result: causing the ire of Moscow. By going to Kiev in the beginning to defend the rights of anti-Russian and pro-European crowds, the US and the EU could only bring about egg being splattered on their faces. That, from the start was a case of nigh-on interference in the domestic affairs of another nation. What happened to the notions of state-sovereignty and self-determination? The US and the EU should never have publically got involved and should have stayed with using diplomatic channels.

Capital controls will only hinder economic progress in Russia, but what are the other alternatives to putting an end to the flight of capital from the country? Using legislation or volume restrictions will only send the message to the world that the Russian economy is still developing and is not worthy of investment. Capital controls won’t be used just yet and capital outflows will have to get to a worse point before that happens. Russia’s current account is preparing to get into a deficit and imports will outweigh exports. The amount of outflows from Russia is nothing today for the moment compared with the financial crisis and the $150 million that left the country every single quarter.

It would be a brave investor or one with fortuitous insight to take the step to invest in Russia today. Russian stock was already running on the cheap side before the sanctions imposed by the West. Markets have no possibility of dealing with the geopolitical risk involved in Russia. Earnings per share (EPS) have already been cut by analysts who predict a drop of 8.5%. That could increase to at least 62% which was being experienced in 2008-2009.

For the moment, Russia is playing it icily cold and decidedly Siberian. But, that is probably proof that something is going to happen. Putin will not be able to sit back and watch his suspension from the herd of the rich boys in The Hague yesterday, not without showing them he’s the boss (at least where he comes from).

Originally posted: Russia: Capital Controls?


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fx's picture

At least the author is a bit more balanced than many other observers. But it seems, he never watched Putin act in the public. He is almost always very calm, even with lots of humor and able to instantly give pretty good replies to all sorts of topics. That guy can easily control his ego and has done it time and gain. he has patience and a strategy. Not always succeeding of course. But usually underestimated by the clueless guys in D.C.. The empty suit in the white house cannot - heck, Obama cannot even talk without prepared sentences and /or a teleprompter.

ebear's picture

Hmmm... wondering if now isn't a good time to pick up some shares of Gazprom?

NickVegas's picture

"He will suffer the public consequences and humiliation of the Western world"


This is your first clue it is MIC sponsored agit-prop, when they start talking about anyones ego, and humiliation, and weakness. They try and frame everything in simple terms, so you as the consumer, can find a simple understanding in the narrative. They allow you to read between the lines with a wink and nod. Nothing else to see here, move along.

gann1212's picture

the world is tired of the b.s of the usa. no jobs here people living in poverty people fighting for minimum wage hobs and yet the largest military on the planet and involved in everyone elses business. can anyone say  nero fiddles while rome burns. the era of the american empire is drawing to a close and what will replace it remains to be seen

the tower's picture

All empires are drawing to a close, what will replace it is loose confederations. Nation states - and their leaders - are obsolete in today's networked world. Only regions are of importance (for practical reasons, like food) and connections between people - who can be in the same building, or on opposite sides of the planet.

lasvegaspersona's picture

Russia doesn't hold a relatively large amount of treasuries but it is the flow that counts. A sudden sell off could beget sudden lower prices and potentially lead smaller countries to sell too. That could lead to more selling. The results could be more than anticipated by those doing the calculations.

philipat's picture

IMHO, it isn't the sale of Treasuries which will cause the damage to The US and the USD but the re-denomination of energy into Gold and/or Rubles/Yuan

El Gordo's picture

Since when does being the world's biggest debtor nations lead to economic strangth?  The reason they can kick Putin out is because Russia does not owe enough money.  If I were living in Europe, I would be taking the Spring and Summer trying to line up a gas supplier for the long cold winter of 2014 while the Chinese were basking in the warm glow of a gas fired fireplace.  US will be involved in elections, so no one over here will be paying any attention.

Soul Glow's picture

The G-8 was obsolete anyway.  They rarely met and the old SUper Powers are only maintaining their footholds by proxy of fiat currency printing and wars and rumors of wars.  The G-20 will now take the G-8's place.

no more banksters's picture

"In essence, this is a war between the big companies to control the energy deposits. The biggest barrier now are the state-controlled giants in Russia and China and neoliberalism is trying to conquer these countries. The Western companies have declared war against companies like Gazprom, as they seek to control all the energy deposits, but in this case things are not so easy. The neoliberal model that opens the road for the Western capital, has to face now, two superpowers."

Soul Glow's picture

$70B leaves Russia, Russia sells $70B of Treasuries.  Sanctions are imposed, Russia raises the price of gas/oil.  Soon the whole financial system will render itself blind.

Omen IV's picture

Russia has $45 billion in government debt or 2.5% of GDP - the US $17 Trillion at 102% of GDP without off balance sheet liabilities - and over $100 + Trillion in probable reserves of a multiplicity of natural resources plus native cash flow from humans - the ultimate in untouched debt capacity!

versus the EU and USA?

with a deal with the chinese - it is a tectonic shift bigger than the numbers because the emotion is very strong against the hegemony of the USA for its jackals actions worldwide - beyond the support of the poodles in the EU - who have no choice.

Lopsided vote at the Organization of American States (OAS) on Venezuela on March 7. Twenty-nine of 32 countries not only rejected Washington's attempt to get the OAS to intervene in Venezuela, but to add insult to injury, passed a resolution expressing their solidarity with the government of President Nicolás Maduro. It is hard to imagine a more resounding diplomatic defeat in a body where the U.S. government still has quite a disproportionate influence


fx's picture

At one point, Obama  may invade there - but wait, he will try the Ukrainian playbook first, financing the opposition to the hilt and then jumping on the "popular uprising" bandwagon. The trouble is, you can start and even jump onto this train. But you will have a hard time controlling it's direction...

philipat's picture

And Lavrov (A class act) versus the pickle boy is also no contest so the outcomes in Europe will probably not be significantly different??

philipat's picture

This piece is more propaganda. Russia holds all the cards. In May, a new Gas deal will be signed with China denominated in Yuan/Rubles. In addition to dumping its Treasury holdings, Russia could do even more damage by denominating its Gas and Oil sales to Europe in either Gold or any currency OTHER THAN USD. Goodbye Petro-Dollar, goodbye US Dollar. Note that there is no Gold leaving Russia.

the tower's picture

No-one holds any "cards" anymore. The EU doesn't need Russia.

Liquid gas - transported by ship from the middle east - will replace Russion gas for the time being. Russia will replace lost income by supplying to the Chinese. No biggie.

EU will switch to renewables in the next decade (keep an eye on the ITER fusion reactor in France), and Iceland will transform itself into the new Saudi Arabia, supplying Europe with energy.

Let's face it, globalism is ending, the world is dividing along cultural lines. That's a good thing.

No need for a reserve currency either. (Petro-) Dollar will diminish, nothing will replace it.

fx's picture

This LNG stuff is as wishful thinking as the "renewable energy" nonsense. Seing it in germany first hand, the problems associated with renewables are gigantic. They are unstable and difficult to predict (solar, wind), so  you still need lots of conventional energy for balancing and back-up. the costs already are horrendous and the impact on consumers and industries in germany is just getting started. Geothermal (iceland) is almost 100 years old, yet it hasn't taken off in any meaningful way around the globe. It's cheap, if you can get it running. But it's neither simple nor quickly to be done.