Whenever the global economy starts to “storm” and prices for oil and other energy resources start to rise, there is no end to the most apocalyptic forecasts about the future of the Russian economy and the entire Russian state.
I will not go into detail for the 100th time about the bias of most of these forecasts, which are an integral part of psychological warfare, but they certainly cause many people to feel at least uneasy. “The fall in oil prices destroyed the Soviet Union, and it, unlike modern Russia, had a really strong and independent financial system,” many of us typically think.
Well, it should be recalled that all that the USSR had “at its heart” in the first half of the 80’s, even before the beginning of Gorbachev‘s perestroika, a gold reserve, which decreased during the years of Brezhnev’s rule from 1,600 to 417 tons (despite the fact that up to 280 tons of gold were extracted annually), i.e., in fact, it was literally “eaten”, reaching “background” values of about $8-10 billion in the prices of that time (in terms of purchasing power, the then “forever green” was about twice as much heavier than the current one). True, under Andropov and Chernenko, it grew to 700 tons, but this was the period of peak oil prices, which allowed for some time to reduce the import of gold.
Soviet assets abroad consisted mainly of real estate necessary for the operation of Soviet institutions and low-liquid commercial structures that served Soviet foreign trade. Moreover, Soviet military infrastructure facilities in the countries of the Warsaw Pact and other Soviet allies had zero liquidity (i.e. the ability to find real buyers).
In modern terminology, their debts to the Soviet Union were “junk”. There was almost no chance of them being paid off in any form.
The country had no actual foreign exchange reserves, only balances on current foreign trade accounts. All foreign exchange receipts directly went to pay for critical imports, primarily food. 20-25% of the food consumed in the country was imported, grain imports reached 43 million tons, and still the total deficit of everything and everything became the most characteristic sign of the Brezhnev era.
At the same time, the external currency and internal ruble were linked very indirectly. The exchange rate, which was published in the newspaper “Izvestiya”, had very limited use for citizens who crossed the border or received money transfers from abroad: those leaving the USSR (except for the COMECON countries) could exchange no more than 30 rubles, but for of those entering with foreign currency and transfers “from there”, of course, there were no restrictions.
At the macroeconomic level, all the country’s foreign exchange earnings were distributed centrally “administratively”. Retail import prices were also determined for consumer goods, taking into account social significance and commercial considerations.
We did not have to talk about the “health” of the internal financial system. After the Novocherkassk events of 1962 (as well as the Polish events of 1980), a severe taboo was imposed on raising the price of food, while the cost of their production continued to grow.
This was partially offset by “outstripping” at times the growth of prices for “luxury goods” (gasoline, furniture, carpets, jewellery, etc.) and “articulation”, when, for example, the factory started to produce a new model of dress, which already cost 10-15 rubles more.
But in order to stop the growing discontent and create the appearance of “increasing the welfare of workers” (after all, inflation in the USSR was the same as with drug addiction and prostitution), wages had to be raised even faster: the amount of payments to the population significantly exceeded the total cost of goods and services that the state could provide, and this gap continued to grow rapidly.
“Extra” money was accumulated on savings books and in “pots”. This phenomenon was called “money roof”, and former economists were terrified of what might happen if the signs of instability and consumer panic, this money “rushes” to the market.
In general, we can safely say that it was not the fall in oil prices in 1985 (which, by the way, was predictable) that brought down the USSR, but on the contrary, the sharp increase in prices for the main energy since the mid-70s gave the Soviet Union a “respite”, an opportunity to “not let out” the accumulated problems for an extra decade. And the collapse of 1985 was not the result of an “anti-Soviet conspiracy”.
Simply, the previous growth caused by the OPEC cartel triggered quite market-oriented processes: investments in the development of new fields, including those that were unprofitable at previous prices, as well as in the introduction of new oil refining technologies that significantly increased the output of finished oil products; oil was almost no longer used as heating fuel (only motor), replacing coal and gas; energy-saving technologies, in particular in the automotive industry, started to actively develop. It was then that models with front-wheel drive, a five-speed gearbox, and a streamlined body shape became dominant.
Demand for oil started to decline, but only the Saudis made efforts to maintain the established price, reducing exports by almost half. The rest of them were in no hurry to join them, and non-OPEC exporters (the USSR first of all) sharply increased their supplies. In the end, the Saudis got tired of it and in November ’85, they announced the lifting of restrictions on exports, immediately dropping prices sharply.
For the USSR, this meant that there was nothing to pay for the necessary volumes of imports (primarily food). It had to borrow money. At first, the loans were commercial, because the Soviet Union had a reputation as a first-class borrower, so the terms were “divine”. But time was passing, and the USSR, even if it was giving loans back, then only by obtaining new ones, increasing the volume of borrowing, and the “enthusiasm” of commercial creditors started to dry up.
We had to apply to the governments of western countries for political loans, and for them, of course, we had to pay a political price. It is clear that the above is a highly exaggerated and simplified description of the reasons for the collapse of the USSR, but it shows its foreign economic component quite fully.
Now let’s see what modern Russia has for a rainy day. First of all, it is the National Wealth Fund of the Russian Federation, which is a “safety cushion”, if you like, an operational reserve that allows the state to compensate for the loss of oil and gas revenues in the event of a sharp drop in the price of oil and fulfil all social obligations assumed.
The NWF works as a financial damper: if oil and gas revenues exceed the very cautious level set in the state budget surplus, the surplus goes to it and goes to the budget, if revenues fall due to the situation on world markets. In July 2020, the size of the NWF was $173.54 billion.
From this amount, approximately $125 billion is taken into account in the volume of Russia’s International reserves, the total amount of which at the end of July this year amounted to $582.7 billion in foreign exchange equivalent. International reserves include Russia’s gold reserve, which has reached a historically record figure of 2,300 tons, which is equivalent to about $150 billion at the current exchange rate.
And this is not all. There are numerous commercial structures with different state participation, such as Gazprom, Rosneft, VEB, VTB, Rosatom, and many others. All of them are actively engaged in economic activities abroad, including the acquisition of certain assets or interests in them, as well as in private Russian companies with foreign assets, lending, etc.
All these assets are those that the Russian state at a difficult moment, even with certain technical difficulties and not without costs, can also “transfer to the cache”. It is not easy to accurately calculate the total value of such assets, especially since they are subject to market fluctuations, and the results are not particularly advertised. But it is known that, according to the Bank of Russia, as of October 1st 2014, all external assets of Russia were equal to $1,410.9 billion (453 billion of them are international reserves). It is unlikely that this figure has changed dramatically in the following years.
And finally, about liabilities. The amount of Russia’s current external public debt is about $50 billion, which, excuse me, is “nothing” compared to the existing reserves and debts of the vast majority of other countries. The total amount of external debt (including private structures) is about 500 billion rubles, but even this figure in our time is absolutely “workable”, reflecting the global nature of the world economy, in which “cross-investment” is a daily practice.
And since mid-2019, the state debt in the broad sense (internal and external debts of the federal government, debts of regions and municipalities), which amounted to 16.2 trillion rubles, has become less than the liquid assets of the “expanded government” (federal authorities, regions, and extra-budgetary state funds).
In other words, if Russia suddenly needed to pay off all its debts immediately, it could be done by using only government deposits in the Central Bank and commercial banks, which is a unique situation for countries with emerging markets.
According to such a commonly used indicator as the sufficiency of foreign exchange reserves in months of import (i.e., how much reserves will be sufficient if they pay for all current imports), Russia ranks 10th in the world with an indicator of 27 months. For comparison, in Germany and the US, it is equal to 0.7 months.
At the same time, the concept of critical imports has almost disappeared for Russia. The country has an almost complete range of natural resources, its industry is also able to produce almost all “critical” types of products, and most importantly, the country’s food security is fully ensured: from the main importer of grain in the world, which was the USSR, Russia became the largest exporter of it, and recently, for example, entered the top ten exporters of sugar, despite the fact that in the Russian Soviet Federative Socialist Republic it was almost not produced, but imported not only from abroad, but also from Ukraine and Belarus.
Of course, there are still “bottlenecks” where stopping imports for one reason or another, especially for a long period, would be very painful, but in financial terms we can talk about units, maybe several tens of billions of dollars a year, which is not critical for Russia ― in any case, energy resources, other natural resources, and grain will be sold on world markets.
In general, of all the countries of the modern world, Russia is probably the most prepared to exist in full autarky. The US, China, and the EU are critically dependent on the supply of most raw materials, including energy resources, and not a single superpower is currently able to produce the entire modern range of industrial products.
The first results of the current coronavirus crisis also speak about Russia’s safety margin. Despite the pandemic, the size of the NWF has increased by $50 billion since March (from 123 to 173), and international reserves have remained unchanged, even growing by $5 billion. In terms of falling GDP, industrial production and rising unemployment, Russia is also among the least affected countries. And the victory in the “oil war” that the Saudis started speaks volumes.
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