Ukraine’s unexpected ally: Foreign currency piling up in Russia

Ukraine’s unexpected ally: Foreign currency piling up in Russia

senior economist, Centre for Economic Strategy, Ukraine
07.07.2023, 09:57

The steady devaluation of the Russian rouble is not just about saving the Russian budget: They have serious problems with their balance of payments.

Revenues from selling resources are falling; the balance of services has long been in the red; and capital outflows continue.

In April, the Russian central bank lowered its forecast for the annual balance of payments surplus from USD 66 billion to USD 47 billion; it was USD 227 billion last year. And even Russian analysts already say the forecast is too optimistic.

In May, there was already a de facto budget deficit.

Russia’s central bank is also reluctant to spell out another economic problem: The quality of foreign exchange earnings that come for resources. Those increasingly are yuan, dirhams, Indian rupees, and even Nicaraguan cordobas and Sudanese pounds.

And while it is still possible to make do with yuan and dirhams – although the incomparably lower liquidity of those currencies means greater losses if they are used – Russia simply has nothing to buy from India, let alone Sudan and Nicaragua, in such volumes.

Indian rupees alone are now deposited in Russian accounts in Indian banks every month for USD 1 to 1.2 billion – something that is very convenient for India, but not for Russia.

That is, even if the overly optimistic forecast of Russia’s central bank is to be believed, a good quarter or maybe even a third of those USD 47 billion a year is illiquid, leaving just little money at Moscow’s disposal.

Russia simply does not have enough currency to import and cover capital outflows, and there is no one to borrow it from.

The problem, or I should say despair, is evident from ‘masterpieces’ such as this one, reported by Russian state news agency TASS.

"[Russian] Senators recommend the Bank of Russia to expand payments within international economic activities, in particular, in Indian rupees, Iranian rials and the UAE’s dirhams, according to a final decree by the Federation Council following a statement by Governor of the Russian Central Bank Elvira Nabiullina."

Let’s just get this straight: Russian senators recommend the central bank pay in rupees, riyals, and other kinds of ‘funny money’. I can imagine Russian central bank governor Elvira Nabiullina’s eyes twitching at such ‘recommendations’: She’d rather see such ‘funny money’ in her grave, but it is on Russia’s balance sheet.

Yes, the Russians are patient, they will swallow it. However, I am increasingly convinced that if, after this phase of the war is over, by some miracle, there is no fundamental reset in Russia's relations with the West, Russia will cease to be a threat to us for many decades.

They simply won't have the resources for another ‘zerg rush’.

Well, perhaps something low-tech will threaten us from time to time and will be shot down by air defence systems with 99-percent accuracy. We know countries that thrive in conditions like this, and we can do it.

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