Safety Factor, or Debtor's Last Resort

EBRD suggests Russia should rely upon its gold and FOREX reserve
At the time when Russian analysts are guessing what may happen after the world oil prices drop, western experts seem to be evidently optimistic. Russia's position today is "quite convenient" to cope with the gradual reduction of the world oil prices. This estimate is given in a report on future prospects of the transition economy countries issued by analysts of the European Bank for Reconstruction and Development. The bank has drawn the following conclusion with respect to Russia: if the Central Bank’s gold and FOREX reserves are set in motion, the sum will be enough for 8.4 months of import. And what is to happen next?

To all appearances, EBRD sympathizes with the activity of Mikhail Kasyanov's government. This is probably because in fact the Russian Cabinet (without much advertising of the fact) follows the recommendations of the World Bank and EBRD given a couple of years ago. That is why the experts say the present-day budget of the country "has been drawn up depending upon reasonable calculations." EBRD experts admit that realization of the budget depends upon the world oil prices. They say that forecasting of budgetary revenue on the basis of the Urals crude oil price at the rate of $21.5 per barrel and regarding the budgetary proficit at the rate of 0.6% of GDP is feasible. Even if by the end of the year oil prices drop to about $20 per barrel, the experts say, the average annual oil price will be all the same higher than that on which calculations of the Russian Ministry of Finance have been based. However, this is just one side of the problem. What do European experts suggest for the Russian government to do in case if the situation will be not that favorable as they describe?

The smart guys from EBRD seem to have answers to any kind of questions. They say that if necessary, Russia may use its financial reserve (now it makes up about $9 billion), or the Russian government may act as its predecessors acted several times: they may enter the world borrowing market to get long-term and reasonably priced loans.

It may be funny, but for the first time western experts said the Russian government would have to make more large-scale borrowings in the foreign markets already last summer. And that was at the time when the budget for 2003 wasn't yet completed and the war in Iraq didn't seem inevitable. At that very period, several research centers pointed out that the situation in Russia's economy seriously reminded of the 1997 pre-crisis year. They also supposed that peak payments of Russia's foreign debt would be very hard for the country in 2003 and Russia would get into more problems connected with loan borrowing.

And if the situation on the world hydrocarbon markets gets actually very poor (and judging by US's post-war actions in Iraq, this is what the situation is going to be), then Russia will  have to use the debtor's last resort. As EBRD experts say, as of today the Russian gold and FOREX reserves invested by the RF Central Bank in the US securities and placed in deposits of American banks "are satisfactorily great enough."

With reference to statements of the RF Ministry of Finance, EBRD estimates the level of Russia's reserves in March at $55 billion approximately. The sum, as experts think, will allow Russia to guarantee total import for 8.4 months at least. As EBRD specialists suppose, the period is quite enough to cope with the catastrophic income reduction as a result of losses in oil export.

Expert appraisal isn't even a doctor's diagnosis. As is known, doctors can also be mistaken with diagnosing, which further entails lethal outcome or disablement of patients. Unlike doctors, international economy experts bear much less responsibility for their forecasts. The European Bank for Reconstruction and Development thinks the Russian government will cope with the problem. Until recently, the government of Russia also declared there was no danger as well and the situation was under control. They said, some previously developed measures would be taken in connection with the situation. However, recently statements made by officials became less confident. And now the problem is passed over in silence. Now, when the RF Ministry of Finance is taking urgent measures for reduction of budgetary spending on defense, education, health care and social sphere, we can make a conclusion that if there was some confidence at all, now it has gone. In connection with this problem, an idea may occur to the government to use the gold and FORES reserves. On urgent needs of the country. Usually, a complete default or war are the situations when the gold and FOREX reserve can be spent. Nothing of this kind can be seen in the country now, but Russia is a particular country where all processes happen unlike in other countries.