Retaliatory sanctions and move on pensions possibly signal that Russia is rising stakes in its poker game with the west and is preparing for further escalation.
In the last couple of days Russia announced pension moratorium and retaliatory sanctions, which possibly have less to do with economics but more with security in case of military escalation and stand off with the west.
A rapid move to freeze pensions in 2015 extending 2014 moratorium possibly signals that government wants to protect pension managers from reporting loses when bond prices collapse or bond defaults loom when financial markets are completely shut down from the west e.g. in case of the further escalation.
If Russia would have moved the peacekeeping force into eastern Ukraine - western sanctions would most likely be elevated to close to 100% freeze of the business. Food imports from the west would probably go into a halt, and Russia would breach its food security until imports be re-channelled through Belarus, Kazakhstan or possibly even through Uzbekistan and Turkey.
At the same time capital controls would most likely be reinstated to protect borrowers in Russia (who borrowed externally) under force majeure. Borrowers would probably be immune in that case from western creditors. But the financial system in Russia will paralyzed and even possibly SWIFT payment system could also stop working. Defaults will loom, but the creditors would possibly be protected by force major of capital controls.
Furthermore pension system moratorium could be useful to protect pension managers from criminal prosecution when they report losses on principal when they ring fenced them from taking new money into the system, while most of their existing holdings mature.
In general if military conflict i Ukraine exacerbates two sectors most likely be affected consumer goods and finance, and here we see the most aggressive action by policy makers in Russia.
Food security is a concept usually neglected in times of peace yet so important in times of natural disasters - droughts etc.. as well as in times of war. Russian retaliatory sanctions - punishment of the west or something else? Russia imports 60% of its food supplies and mostly across its western border. These are mostly finished goods as well as milk (mostly dry) and meat. It doesn’t mean that Russian agricultural sector is stagnating, no. Russia has been a net exporter of cereals and most other commodity row products (except meat and milk) for 3 or 4 years now. Its just that Russia does not process its row agricultural products and imports the finished foods as it lacks the processing capacity. Just like it does in the oil sector. To recalibrate agri sector towards internal food processing, more investment is required. But that investment is unlikely to come in the scarce capital condition of higher rates and elevated risk.
By this logic Russia’s changes to current account are likely to be minimal on the back of declining imports from the west. But its dependence on western import routes will be much less. Exactly the condition it wants to achieve with less dependence on western imports.
Economic benefits are likely to be minimal - while inflation toll will negatively affect russian export sectors i.e. oil and gas as well as metals and mining that are temporarily enjoying benefits of weaker ruble conditions.
Pension moves just like last year, prepare pension managers and other money managers in Russia for a bumpy year in 2015. We don’t see the move to freeze pensions as a move towards limiting the pension reform. It is rather insiders move to protect pension managers from further damage to their portfolios, when the government calculates that damage could be material.
Russian pension law has not yet been changed to accommodate more risk taking by pension managers. Therefore it is still a criminal offence to lose on the principal of the pension money.
Ringfencing the pension funds from growing - allows limiting potential damage to balance sheets of pension companies if the situation exacerbates.
By this token recalling the 2014 pension moratorium, it could be yet another hint that, it is quite possible that Russia had been planning on quite a bit of the events in Eastern Ukraine a while ago. In which case the speculations that much of the capital flight of the past 3 or 4 years was Russian state money moved to the west and stored in deposit boxes in cash rather than deposited to bank accounts. Cash which will be used under sanctions, if situation exacerbates.
Good luck! And don’t stay out of the market for too long. As the policy of being too cautious is the greatest risk of all.
Ovanes Oganisyan research@midlincoln.com
|