Steen Jakobsen
The Bank of Japan has abandoned quantitative easing and the European Central Bank may taper its bond-buying programme, so what is the role of central banks in 2017, asks Saxo Bank’s chief economist Steen Jakobsen.
Article / 08 July 2016 at 10:00 GMT

Russian ruse keeps currency reserves afloat

Russia oil and gas expert
United Kingdom
  • Reuters report reveals Russia's reserve fund will be empty by mid-2017
  •  Budget deficit does need covering, but central bank will print roubles to do so
  • FX reserves will essentially be left intact enabling FX to grow $25bn in H1
  • Central Bank has been building reserves by buying gold
  • Gold price has been on the rise since the start of June

Russia's reserve fund may need fixing, but a central-bank ruse should
mean that it matters not too much to the ordinary Russian. Photo: iStock

By Nadia Kazakova

The Russian government must have been collectively chuckling over their coffee when they read the Reuters exclusive revealing that Russia's reserve fund will be empty by mid-2017 and a larger Wealth Fund would be nearly empty by 2019.

The money would be spent to cover a cumulative budget deficit of RUB 5.9 trillion (just over $92 billion at the current FX rate) in 2017-19, as well as over RUB 2tn in 2016. 

It's not that this is incorrect -- the federal budget deficit would need to be covered and reserve funds would be used up. However, neither the government nor the Russian central bank have plans to actually sell billions in FX reserves that have been sitting in government accounts. 

As has been happening for some months now, the central bank of Russia might simply print roubles to cover the budget deficit, while leaving FX reserves intact. For the Russian central bank, it involves taking FX from the left pocket and putting it into the right (the left pocket being government FX reserve accounts at the central bank). 

The government gets the roubles and the central bank keeps the FX. The roubles eventually end up as deposits in the banking sector, partially replacing the central bank's lending to the banks.

To explain the situation in everyday terms, the government is like a household that needs to pay bills but has run out of roubles. The household does have dollars and euros in its pocket, but is reluctant to spend them. Instead, a friendly central bank prints a fresh bunch of roubles and gives it to the government to cover those bills.

This would explain why Russia's total FX reserves (which include the Reserve Fund and National Wealth Fund) have gone up by over $25bn to $393.7bn in the first six months of 2016. The Reserve Fund might have gone down by $11bn in H1 2016 to cover the budget deficit (which was 4.3% of GDP), but FX has been simply reclassified within total FX reserves rather than spent. 

Breakdown of Russia's FX and gold reserves, $ billion

The central bank has been building reserves by buying gold (and its price is going up), which might have added over $10bn to the FX coffers in H1 2016. A revaluation of the euro holdings added around $1-2bn. The largest addition (at over $10bn) seems to be the repayment of REPO loans by Russian banks back to the central bank.

As to the budget deficits in 2017-19, they would be covered by the combination of money printing (and reclassifying rather than spending FX reserve funds) and an increase in net borrowing by the government. To keep the FX reserves (which seems to be the overriding priority), the central bank would need to continue monetising budget deficit by printing roubles to cover excess expenses. 

When the reserves  run out notionally, the government would need to borrow. According to Reuters, the net borrowing would rise to over 1tn roubles a year in 2017-19. But the central bank could easily monetise some of the new government debt by buying it back from the banks.

Russian federal budget deficit and sources of its financing *, RUB bn
Source:, author's estimates. Note: * = as proposed by Ministry of Finance 

Essentially, it does not really matter when Russia runs out of the Reserve Fund or National Wealth Fund, except for accounting and, probably, for psychological reasons as it might be easier to push through spending cuts. The deficit is being financed by the money press rather than by spending the country's foreign exchange, and it is bound to be inflationary.

Combined with a freeze on government expenditure in nominal terms in 2017-19, proposed by the Ministry of Finance, real incomes are likely to go down, taking with them consumer demand. Exports are already hitting the buffers on domestic capacity constraints and could suffer if global demand for commodities softens.

While Russia's FX and gold reserves are solid and reports about their demise might be slightly exaggerated, it might be what is needed for the  struggling Russian economy.

 The struggling Russian economy needs a catalyst. Photo: iStock

— Edited by D. Deacon and Martin O'Rourke

Nadia Kazakova is a Russian oil and gas expert
08 July
Gigi B. Gigi B.
"Gold price has been on the rise since the start of"... January 2016, not June
08 July
Martin O'Rourke Martin O'Rourke
Hi Gigi B. I think the reference on gold here is really related to the dovish Fed performance after the shocking May NFP result that forced it to reassess its rate-hike trajectory at the start of June. Gold then got another boost from that sudden surge in buying after the UK decided to leave the European Union.
08 July
Nadia Kazakova Nadia Kazakova
Hi,Gigi B. Thank you for the comment. The gold price did rise substantially since January. It was at $1,116/oz on Jan 1, then at $1,318/oz on June 1 and at $1,318 on July 1, with all the ups and downs in between.
08 July
Gigi B. Gigi B.
yes, it was only a small typo, while I definitely agree with the text of the post: basically, what the CBR is doing is a (very) light QE, done with the goal to keep the inflation in check. I also appreciate their gold risk management strategy: supposing a worst case scenario where the Italian banking sector + Deutsch Bank go bust, then the gold price would skyrocket to the moon, giving enough protection.
10 July
michelkozah michelkozah
The Ecb will step soon to save the DB and Italian bank MP. The price of gold is manipulated that's why we are seeing all the correction in silver though I see Gold rising to 1400$ soon
10 July
Leroy Leroy
"While Russia's FX and gold reserves are solid and reports about their demise might be slightly exaggerated". I'd say it is a gross exaggeration, rather than slight, if forex reserves rose by $44 billion, from $350 billion in mid April 2015 to around $394 billion today.
Yes, it was a right move, it seems now, to continue buying gold, but I'd speculate that this a strategic choice rather than playing the market for any gains. Neither US, Germany, Italy, nor China sell off their gold when prices fluctuate. Centuries later, gold continues to hold a timeless value irrespective of which world currencies appear or disappear.
10 July
Leroy Leroy
an odd picture, seems like 1990s in Moscow and ruing winter. The article is written in June 2016.
10 July
Tepord Tepord
The 28-nation Western defense alliance decided to move four battalions totaling 3,000 to 4,000 troops into northeastern Europe on a rotating basis to display its readiness to defend eastern members against any Russian aggression.
10 July
Tepord Tepord
Oh, my !
10 July
Tepord Tepord
from "The Unforgiven" to "Wind Of Change"


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