China, Russia Sign CNY150 Billion Local-Currency Swap As Plunging Oil Prices Sting Putin

Tyler Durden's picture

While it is beyond a doubt that the primary catalyst for Europe's triple-dip recession has been the nearly two quarters and counting of escalating Russian sanctions that were supposed to solely harm Putin (because who could have possibly foreseen that plunging German exports to Russia would have a far greater impact on the export-driven German economy), the truth is that the Kremlin itself is starting to hurt, if not so much as a result of the European trade embargo but mostly due to crashing oil prices, which have been driven lower almost exclusively by Saudi Arabia as part of its most recent secret bargain with the US, a bargain which as we read today is likely to tear OPEC apart.

One place where Russia has been hit the hardest as a result of tumbling oil prices, is the crashing currency, with the Ruble hitting new record lows against the USD on a daily basis. In fact, as Bloomberg reports, Russia has been forced to spend a whopping $6 billion in just the past 10 days to slow down the tumble of the RUB:

The ruble extended its longest losing streak in more than a year as $6 billion of Russian currency interventions failed to stem the depreciation amid tumbling oil prices.

 

The ruble weakened 0.5 percent versus the dollar-euro basket to 45.2911 by 1:50 p.m. in Moscow, taking its seven-day decline to 2.2 percent, the longest stretch of losses since the nine days ended Aug. 1, 2013. Oil, which along with natural gas contributes almost half of Russia’s revenue, fell 2.4 percent to $88.08 per barrel in London, the lowest since December 2010.

 

Russia’s central bank intervened in the past 10 days to stabilize the ruble, central bank Governor Elvira Nabiullina told lawmakers in Moscow today. The action, which comes as President Vladimir Putin orders a withdrawal of Russian forces from Ukraine’s border, has so far failed to halt the ruble’s decline amid a domestic foreign currency shortage stemming from sanctions. The cost of swapping rubles into dollars widened to a record.

 

The main driver for the ruble right now is the oil price,” Dmitry Polevoy, the chief economist for Russia at ING Groep NV, said in e-an e-mailed note. Crude’s decline “totally eclipses” the “reassuring news” that Russia announced it was pulling back forces from Ukraine’s borders, he said.

Needless to say, Saudi Arabia is hardly getting a Christmas card from Putin this year, although one wonders, just what channels will the former KGB spy use to retaliate against the Saudi princes. Because retaliate he will.

In the meantime, however, Putin has other problems as well, the main of which is a direct consequence of the tumbling currency, namely soaring inflation, and the all too possible reality of upcoming price controls. From the WSJ:

Russia’s government is considering freezing prices for some “socially important” goods as inflation nears a four-year high, the government newspaper Rossiyskaya Gazeta reported on Thursday.

 

Russia had been aiming to bring inflation to a post-Soviet low of 5% this year, but the annexation of Ukraine’s region of Crimea ruined the plan. The annexation and the subsequent sanctions imposed by Western countries have put pressure on the ruble, making imports more expensive. The Kremlin’s decision to ban food imports from states that have sanctioned Russia has further spurred already burgeoning inflation.

 

Russia’s Industry and Trade Minister Denis Manturov said in an interview with Rossiyskaya Gazeta that the government may artificially stabilize prices for some 40 vital goods if a price jumps by more than 30%. He did not say what these goods were or when the price freeze may happen.

If Venezuela or Argentina is any indication, price controls always end badly. And the local population knows this, which completes the triple whammy of Russia's sharp economic impact, namely the accelerating conversion of ruble denominated savings into dollars, sapping Russian commercial banks' dollar holdings, and yet another drain on Russia's central bank reserves:

More Russians are keeping their cash in dollars and euros as the ruble falls to records amid central bank efforts to maintain control over the pace of the decline.

 

The number of people with foreign-currency holdings rose in September from August, Bank of Russia said in its inflation report published Oct. 10. OAO Sberbank, Russia’s biggest lender, had its first drop in retail deposits since May last month, while the premium to swap rubles for dollars climbed to a record at the end of last week, data compiled by Bloomberg show.

 

Investors are betting the most in six years that central bank Governor Elvira Nabiullina will have to raise interest rates after about $6 billion of interventions failed to prevent the ruble from reaching all-time lows every day last week. While the economy risks sinking into a recession amid U.S. and European Union sanctions over the crisis in Ukraine, policy makers must underpin confidence in the ruble.

 

“Once the mindset of a crisis sets in, it becomes a self-fulfilling prophecy,” Neil Shearing, an economist at Capital Economics Ltd. in London, said by phone on Oct. 10. “Residents start to anticipate further weakness in the ruble and shift out of rubles and into hard currency and that precipitates further weakness.”

To be sure, the traditional read through of this news is quite negative for the economy of yet another country which is reliant on the petrodollar. On the other hand, another take is that the collusion between the US, Europe and now Saudi Arabia will merely force Russia to accelerate its bilateral ties with China, in everything from trade to capital flows. Indeed, that is precisely what is happening. As RIA reported over the weekend, China is ready to export agricultural products and oil and gas equipment to Russia, China’s Vice Premier Wang Yang stated Saturday. Products, for which Russia could pay in either Rubles or Renminbi, thereby accelerating the de-dollarization of bilateral commercial relations.

"China is willing to export to Russia such competitive products as agricultural goods, oil and gas equipment, and is ready to import Russian engineering products," Wang Yang said during the 18th session of the Russian-Chinese Commission for the Preparation of Regular Meetings of the Heads of Governments.

 

He noted that trade turnover between Russia and China is increasing every year. Compared to the same period of 2013, it has already grown by 6.7 percent. This trend will help to accomplish the task to increase trade turnover to $100 billion by 2015. The Russian-Chinese Commission for the Preparation of Regular Meetings of the Heads of Governments is currently taking place in Sochi. The annual Russian-Chinese Economic Forum is held within its frameworks.

 

The participants of this year's forum have noted a positive trend in the development of joint investment, economic, industrial projects, and strengthening of partnerships between the two countries.

Bloomberg added that Russia, China sign accords on energy, banking, technology, during a ceremony overseen by Russian Prime Minister Dmitry Medvedev, Chinese Premier Li Keqiang in Moscow. Pacts include accords on east gas pipeline route, double-tax treaty, satellite navigation, high-speed rail cooperation, Rosneft-CNPC cooperation, local-currency swaps, and so on. China Exim Bank also signs accords w/ VTB, Vnesheconombank, Russian Agricultural Bank.

And the cherry on top came moments ago when, as if to assure all involved parties that there will be enough capital support on both sides, the PBOC released a surprising announcement that the central banks of China and Russia signed a 3-year, 150 billion yuan bilateral local-currency swap deal today, according to a statement posted on PBOC website. Deal can be expanded if both parties agree, statement says. Deal aims to make bilateral trade and direct investment more    convenient and promote economic development in 2 nations.

To be sure, some such as Bloomberg, are skeptical that the unprecedented pivot by Russia toward China as it shuns the west, will merely harm the Kremlin. Others, however, wonder: who will be left standing: Europe, with its chronic deficit of energy and reliance on Russia, a country overflowing with natural resources, or Russia, whose economy is currently underoing a dramatic and painful shift, as it scrambles to dissolve all linkages to the Petrodollar and face the Gas-O-Yuan? Perhaps it is worth refreshing this subject in a few months, after Europe's economic situation is made far more clear after what is sure to be a long, cold winter.