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Russian Currency Crisis and Defaults Could Create Contagion in West
Russian Currency Crisis and Defaults Could Create Contagion in West
Russia’s currency market witnessed further huge volatility again today. The finance ministry said it would start selling foreign exchange which are primarily in dollars. This appeared to reduce selling pressure on the battered rouble.
The fall of the rouble this year has been severe, with a 50 percent fall against the dollar and of course gold this year. The slide has been precipitous as in the past two days alone, it fell about 20 percent against the dollar and gold.
On Monday, the ruble fell 10% against the dollar and gold followed by another crash of 11% on Tuesday, despite a massive rate hike.
The heavy selling pressure this week, made the central bank sharply increase its key interest rate by an unexpected 6.5 percent or 650 basis points. The move did little to buttress the currency in the short term as speculators and traders continued to sell the rouble.
Momentum is clearly down; computer-driven markets and increasing dominance of algorithmic or black box trading is exacerbating the rouble’s short term weakness. However, the sharp increase in interest rates and the fact that the fundamentals of the Russian economy remain reasonably sound and not much worse than many western economies, will support the rouble. It is likely to stabilise at these levels and recover in the coming months.
It is also important to note that political and economic relations between Russia and China are very good at the moment and China would likely provide financial assistance – if indeed that is needed.
The rouble rout is due in part to the collapse in oil and now very low oil prices. It may also be due to the effects of western sanctions. This is likely to rally the Russian people behind Putin and will not have the impact that western leaders hope it to have.
The effects of the crisis are already being felt in western Europe and in the global financial system.
Austria’s third largest bank, Raiffeisen Bank lost 10.3% of it’s share value on the news that the Russian central bank had raised rates a stunning 6.5% overnight on Monday.
It is worth remembering that it was the bankruptcy in 1931 of Austrian bank Creditanstalt’s, founded by the Rothchild family, that resulted in a new global financial crisis and ultimately the bank failures and deep recessions of the Great Depression.
In France, Societe General – a bank which is also exposed to the Russian economy to the tune of €25 billion – lost 6.3% of it’s share value. If the Russian crisis continues, and there is little to suggest it won’t – with the U.S. set to impose a new round of sanctions, the repercussions for the west and the global economy could be drastic.
In the modern, interconnected, globalised world of today, there is a real sense that and a risk that western leaders are “cutting off our nose to spite our face.”
The global banking system has a very limited capacity to absorb sizeable losses and the risk of contagion is as high now as in 2008. It may be the case that western banks and institutions have more to lose than Russia in the longer term.
Russia is still energy and resource abundant with close economic ties to the industrialising East, Asia and China. It also has substantial gold reserves – some 10% of their sizeable foreign exchange reserves of $370 billion.
It’s oil companies are reasonably well insulated from the crisis as the rouble value of their exports has soared.
It should also be noted that what looked like a public display of weakness, that was Monday night’s rate hike, is most uncharacteristic of Russia, especially under Putin. In the murky goings on of geopolitics, it is wise to question every action and motivation. Some have suggested that the move could lead to severe losses in the interest rate market and the multi trillion interest rate swap market and this could be part of the reason for the move.
Putin is well aware of Warren Buffett’s “financial weapons of mass destruction”.
In the event of another banking crisis due to financial instability, market crashes and or western banks exposure to Russia, larger deposits will be confiscated by banks as “bail-in is now the rule,” to quote Irish finance minister Michael Noonan.
The experience of Russian holders of gold since this crisis began is worthy of note as evinced by the chart above. Gold has acted as a very effective insurance policy against financial instability and currency instability for those ordinary Russians prudent enough to have allocated some of their savings to gold as a diversification.
Must-read guide to and research on bail-ins can be read here:
Guide: Protecting your Savings In The Coming Bail-In Era
Research: From Bail-Outs to Bail-Ins: Risks and Ramifications – including World’s Safest Banks
MARKET UPDATE
Today’s AM fix was USD 1,199.00, EUR 962.36 and GBP 763.16 per ounce.
Yesterday’s AM fix was USD 1,199.25, EUR 960.25 and GBP 763.95 per ounce.
Spot gold climbed $4.60 or 0.39% to $1,196.30 per ounce yesterday and silver fell $0.40 or 2.48% to $15.74 per ounce.
Gold in Singapore was flat again overnight with gold hovering just below $1,200 per ounce before slight gains in London saw gold touch the $1,200/oz level. Spot gold was up 0.3% at $1,199.66 an ounce by late morning in London. A volatile session yesterday, saw a high above $1,221 then a drop to a one-week low of $1,188.41, before finishing stronger.
The electronic gold market or futures gold market continues to have all the hallmarks of a managed market and gold seems tethered to the $1,200/oz level for now despite the very bullish geo-political backdrop and robust global demand.
There is a lot of market chatter about Russia selling gold – mostly by non gold experts and people who are not renowned for analysis of the gold market. The chatter is just that chatter as Russia is likely to keep accumulating gold rather than sell it.
Russia is unlikely to sell gold in any meaningful way as long as Putin remains at the helm. Indeed, while a wily Putin may allow an announcement regarding gold sales and official statistics may show a reduction in reserves, Putin may adopt the Chinese gold policy and not be so transparent regarding the Russian gold reserve accumulation and reserves in general.
Traders await the outcome of the U.S. Federal Open Market Committee’s last policy meeting of the year, where traders will look for a clue as to when they may raise interest rates.
The Fed’s statement is at 1900 GMT and analysts are looking for the phrase “considerable time” to be removed as a signal that the Fed may take action in 2015 to hike rates. As ever it is important to watch what the Fed does rather than what they signal they might do.
SPDR Gold Holdings, the world’s largest gold ETF, saw a second consecutive daily outflow on Tuesday, of 1.8 tonnes, after they posted their largest weekly rise last week since July.
In other precious metals, silver climbed 1% to $15.92 an ounce and platinum up 0.7% at $1,197.52 an ounce. Palladium was up 0.8% at $785.31 an ounce.
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http://mobile.reuters.com/article/idUSKBN0JV11Y20141217?irpc=932
No 'could' about it.
I think it will be a cold February.
I think Russia is a bit stronger than many people think, but for a long time world currencies have traded in a somewhat narrow range allowing people to think the world economy was on a sound footing as central banks across the world continued to printed and pumped out looking for growth. Recently several major currencies made multi-year highs or lows depending on the match-up. This is a sign of instability.
Because of weak demand for goods most of this freshly printed money has flowed into intangible investments Inflation has not been a major problem, but the seeds for its future growth have been planted everywhere. John Maynard Keynes said By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
While there are not many Bond Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known. Weakness in the value of the Yen, Pound, and Euro must not go unnoticed. More on why this may be a signal that currency trading is about to get very wild in the article below. Please note, this may also be sending a signal that the whole system is unstable and the stock market could drop like a stone due to contagion.
http://brucewilds.blogspot.com/2014/09/caution-alert-currencies-may-get-wild.html
how is Russia going to default? They have 14% debt to GDP, US has 100+% to GDP and Japan has 244% of GDP?
And what about their main backstop? CHINA and YUAN swap facility? China is the factory of the world, I feel so isolated! German supplies all the Porsches, Mercs etc as well as the Ferrari's to China, Russia's really going to feel isolated.
Yea I can tell there is lots of fear of contagion out there what with the e-minis up 3% and the VIX futures down 15% since yesterday, you can practically taste the risk in the air....
Hooray Russia is going to sell its gold. You guys can finally get all the physical you want. With 1000 tons to sell, you can't complain anymore, can you Zh'ers ???
um, might need a new dealer
Gotta hand it to the kids of this generation all over the world, they all KNOW who the bad guys really are, and they are not afraid to speak their truth.
https://www.youtube.com/watch?v=y68RNJzwtKQ#t=24
From this Link:
http://investmentwatchblog.com/a-great-deal-of-what-the-fed-has-been-doi...
The derivatives market represents what – $6-700 trillion in exposure? Probably worse after this year.
Now look at this – 147 close knit companies that form the core of global commerce:
http://www.newscientist.com/article/mg21228354.500-revealed–the-capital…
The top 50 of the 147 superconnected companies1. Barclays plc
2. Capital Group Companies Inc
3. FMR Corporation
4. AXA
5. State Street Corporation
6. JP Morgan Chase & Co
7. Legal & General Group plc
8. Vanguard Group Inc
9. UBS AG
10. Merrill Lynch & Co Inc
11. Wellington Management Co LLP
12. Deutsche Bank AG
13. Franklin Resources Inc
14. Credit Suisse Group
15. Walton Enterprises LLC
16. Bank of New York Mellon Corp
17. Natixis
18. Goldman Sachs Group Inc
19. T Rowe Price Group Inc
20. Legg Mason Inc
21. Morgan Stanley
22. Mitsubishi UFJ Financial Group Inc
23. Northern Trust Corporation
24. Société Générale
25. Bank of America Corporation
26. Lloyds TSB Group plc
27. Invesco plc
28. Allianz SE 29. TIAA
30. Old Mutual Public Limited Company
31. Aviva plc
32. Schroders plc
33. Dodge & Cox
34. Lehman Brothers Holdings Inc*
35. Sun Life Financial Inc
36. Standard Life plc
37. CNCE
38. Nomura Holdings Inc
39. The Depository Trust Company
40. Massachusetts Mutual Life Insurance
41. ING Groep NV
42. Brandes Investment Partners LP
43. Unicredito Italiano SPA
44. Deposit Insurance Corporation of Japan
45. Vereniging Aegon
46. BNP Paribas
47. Affiliated Managers Group Inc
48. Resona Holdings Inc
49. Capital Group International Inc
50. China Petrochemical Group Company
* Lehman still existed in the 2007 dataset used
Graphic: The 1318 transnational corporations that form the core of the economy
(Data: PLoS One)
What are the implications for contagion and systemic risk?
Then think back to the Japanese earthquake – a fantastic example of the fragilty of our ‘just in time’ supply lines. Japanese manufacturers of NAND RAM took their plants offline for seconds, but the supply chain effect caused massive problems for over a year and caused prices to rise significantly.
http://www.ibtimes.com/supply-chain-disruptions-hit-japanese-electronics…
Debt time bomb + systemic contagion + supply line fragility + low inventories = ?
Is it possible that the extreme measures being taken reflect the extreme threat that we face?
Would there be a single business on the the planet that would remain unaffected?
Do you think you’ll be popping down the local supermarket for a loaf of bread still?
MG
So he wipes out massive foreign exchange reserves to by a lot of lumps that have no relevancy to his economy.
He could produce the fifty tons in a few if he wasn't such a dope. Instead he sets himself up for a currency collapse and a hyperinflation.
Great job poopie!
I'm not going to bother with the litany of blunders from this clown over the past year but I do think its safe to say he's out of options.
Clearly he's lost the economic war. Just as clearly he has lost the political war too. He can fight The Actual War however. I think NATO is waiting and wondering what's taking so long....
The Vampire Squid will not give up easy. If they somehow lose money the gov't will see to it that they get it back, because this speculation is purely political.
Too bad all of our mortgages weren't in Rubles.
Gold looks weak
http://investfts.blogspot.co.uk/2014/12/gold-update-for-week.html
The Russians cannot win this financial war unless they threaten to go nuclear ie default on all debts to the West. Default against all countries that are boycotting them. Their credit will still be good in Africa and Asia and they can still buy goods through those countries.
They aren't likely to default on their soveriegn debt but all bets are off on corporate debt of which most belong to EU banks. That could start a minor (or not so minor) panic.
I am a loyal Zerohedge follower for a few years. Have my PMs, lead and land but I am f'in stupid when it comes to the markets and the methods for playing the market (I don't so maybe I am not so stupid, just non-edjumucated!). Anyway, I can see Russia dumping US treasuries but why don't they simply start demanding gold for their natural gas they sell to the EU? That or simply raise the price significantly in any other fiat currency aside from the US dollar. Its not like the EU has much choice but cough it up. Can someone edujumacate me on why this would not work out for the Russians (aside from the mainpulation in the gold market to kill any gains they might make).
We all know that oil will not be down forever this game can only be winned by the guys with more patience.
Russians tend to be patient in the main but that doesn't mean that they won't take countermeasures. You kind of have to wonder what they have in their intel files that might be damaging to western leadership. There are ways for them to get around a lot of the problems that they are having and with America tryng to piss off the rest of the world, we could have interesting times come Spring.
"Western block's actions not only failed to isolate Russia, but seems that managed to expand Russia's and China's geopolitical influence."
http://failedevolution.blogspot.gr/2014/08/a-perfect-timing-for-argentin...
I am rooting for Russia. Amerika sux.
http://www.godlikeproductions.com/sm/custom/a077380bbc.jpg
Russia has over $400billion in foreign reserves, and $135bill worth of debt repayments due by the end of 2015, buy which time the oil price will most likely have recovered as the shale oil producers one by one get wiped out.
What is this alarmist tabloid nonsense about Russian default?
I suppose these is a chance that the Russian central bank might blow the reserves pretending to prop up the rouble, and "give" them to the currency speculators, probably friends of theirs anyway.
$650 billion or so. A Swiss newspaper yesterday said Russia has more foreign exchange that the $400 billion or so that was cited.
Not the government, but Russian industry. The debt is owed in USD and EU. I would love to see a default though. That would blow up the EU banks to smithereens like a financial nuclear blast.