Vladimir Putin cornered: which way does he jump?


Russia's oil industry accounts for about half its export income, and about 13 per cent of its gross domestic product, and the oil price is about 45 per cent below its level in the first half of this year.

Oil is priced is US dollars, however, and the Russian rouble has halved in value against the greenback since the beginning of September.

As far as Russia's export income goes, that's pretty much a wash: Russian oil exporters are receiving half as many US dollars as they were when oil was about $US100 a barrel, but getting twice as many roubles for every dollar they convert.

It's the kind of currency-commodity price symmetry that our Reserve Bank has been pointing out is a missing link here, and Russia's sovereign debt load is also low, about 13 per cent of gross domestic product compared with an OECD average of 74 per cent.

So why did Russia's central bank raise its key interest rate from 10.5 per cent to 17 per cent this week in an unsuccessful attempt to stop the rouble's descent, and why are global markets becoming convinced that Russia is on the verge of a financial and economic catastrophe?

One key is that while Russia's government debt-to-GDP ratio is low, what might be called the Russian government diaspora is more aggressively geared.

Russian banks and companies that are partly owned or heavily influenced by the Putin government were shouldering foreign debts of $US714 billion in 2013 according to the CIA factbook. That was about 34 per cent of Russia's GDP in that year, and the rouble's dive means twice as many roubles need to be found to make interest payments and roll debt over as it falls due: about $US30 billion ($31.2 billion) is due to repaid this month, and about $US100 billion is due to repaid within a year.

The 69.5 per cent Russian government-owned Rosneft oil group is a prime example. It had borrowings of about $US10 billion due for repayment in the December quarter, including $US6.9 billion due at the beginning of next week. Another $US19.5 billion is due for repayment next year.

Rosneft's oil revenue in roubles has been shored up by the Russian currency's depreciation, but its debt load and debt service task have been magnified.

Last week, Russia's central bank assisted a 625 million rouble ($US10.8 billion last week, $US9 billion now) Rosneft bond sale by declaring that the oil company's bonds would be accepted as collateral in a similarly sized bond auction of its own.

It was, in effect,  the central banking equivalent of a "put" to those who had acquired the Rosneft bonds, and might have been used to support other corporate debt raisings if it had worked. The central bank's debt auction failed to attract bids, however, and it announced its huge rate hike soon after.

Russia's government and President Vladimir Putin are in a tightening vice.

The huge interest rate hike has failed to resurrect Russia's currency and alleviate foreign debt servicing pressure, and is a sledgehammer for economic activity, profits and government tax receipts.

Measured in roubles, the price of almost everything Russia imports has doubled, even as currency-driven export revenue gains are undermined by the oil price dive.

Western banks, including France's Societe Generale, that have debt exposure to Russia are under pressure and Western investors in Russian bonds and the rouble, including the world's biggest bond fund manager, Pimco, have racked up losses. Investors generally are retreating from emerging markets and reinvesting in safe havens, including US bonds.

Where to now? It could turn quickly, or it could get worse.

Economic sanctions created by the West after Russia's intervention in Ukraine are still in place, and Saudi Arabia is still pumping enough oil to create oversupply and downward pressure on the oil price.

But US Secretary of State John Kerry said this week that sanctions could be lifted quickly if Putin made "a different set of choices" in Ukraine.

Some in the market also speculate that Saudi Arabia's aggressive oil production is another economic weapon aimed at Putin. Saudi production cuts would push the oil price up, easing the pressure on Russia and other high-cost oil exporters, including Iran, Venezuela and Nigeria.

That theory is going to be tested only if Vladimir Putin backs down, however. The pressure on him is extreme, but he hasn't blinked yet.

This story Vladimir Putin cornered: which way does he jump? first appeared on The Sydney Morning Herald.