I'm a few days behind on this as I've been busy with other parts of this website, but there have been a number of developments since my post last week regarding how Russia discusses its currency maneuvers. The specific language used here is VERY important, so bear with me as I get nitpicky.
First, the facts as reported by various news outlets whose links are embedded within each bullet point:
- The dollar suffered an immediate decline following the announcement of the various plans to buy IMF bonds but then bounced back on Yosano's comments.
"We are not going to significantly change the structure of our investments. Ten billion is not a significant change (in currency reserve holdings). A serious change is when we used to invest $100 billion in Freddie Mac and Fannie Mae, but no longer do. In the nearest future, I do not see major changes in our policy in relation to the dollar."
"I don't see the dollar as being weak, I think the dollar has been today correctly valued by the market. We see a dollar which today is stronger than one year ago....so I don't see today a weak dollar and I don't forecast that we would have to expect many changes in the coming time."
Now for some additional items buried deeper in the above stories that are worth noting:
- Luis Costa, Emerging Market Debt Strategist for Commerzbank in London, essentially echoed my comments on this topic last week:
"As usual the market takes everything at face value and thinks everything will be implemented tomorrow. I don't believe this will be done on a significant magnitude over the next six to twelve months. It's something they have in mind in the long term."
- Maxim Oreshkin, OAO Rosbank's Research Chief, agreed:
"The central bank has never stood out for making fast moves with its reserves. If it changes certain groups it will happen smoothly."
- Russia's total central bank reserves currently stand at about $409 billion, of which 90 percent is split approximately evenly between dollars and euros, with the remainder in sterling and yen. Of the 45 percent in dollars, or $180 billion, $120 billion of this is in US Treasuries, with the remaining $60 billion presumably in cash.
- China and Japan hold SIGNIFICANTLY higher portions of dollars, both in cash as well as US Treasuries. For those of you who want to dig further, 12 months' worth of trailing data through 2009Q1 on foreign holders of US Treasuries can be found here.
Here's what did NOT happen regarding the currency issue while all of this was going on:
- There was no confirmation of which currency IMF bonds will be denominated in but preliminary indications point to Special Drawing Rights (SDRs). If it winds up being US dollars, this will do nothing to further diversify any central bank's foreign exchange reserves allocation. If the bonds wind up being denominated in SDRs, not only are the amounts discussed so far too small to make a significant impact on relative distribution, but the US dollar will still be indirectly supported, due in large part to the United States' overwhelming quota subscription in the IMF's funding structure, which in turn dictates SDR pricing.
- Nouriel Roubini, whose prescience regarding the current global economic downturn has gained him household name recognition, offered his prognosis for the dollar's status as the world's primary reserve currency. And much like his consistently bearish outlooks for the past number of years, he avoided naming a date or quantitative threshold for the dollar's pending doom. As the old saying goes, "even a broken clock is right twice a day."
- Nobody to my knowledge has directly addressed any principal actor's ulterior political motives in expressing support for the dollar. At a later date, I will take up this particular aspect of Russia's currency dilemma in greater detail.
- I have not posted any quotes from any principal actors who think the dollar will lose primary reserve currency status in the immediate future because I cannot find any but am absolutely open to any such commentary out there. "Principal actors" in this case means policymakers or market participants.
Finally, some concluding comments and observations of mine:
Recent history is riddled with examples of unfulfilled promises from government officials owing to a variety of reasons. When it comes to economy-related promises, the current state of affairs is such that with new information needs being revealed daily, if not more frequently, the value of any promise or intent is only truly realized upon delivery. The more colloquial way of saying this: Talk is cheap.
Interpreting that notion in the Russian context is entirely subjective. The Russian government may go back on its promise to buy IMF bonds; it may go back on its outlook of having full confidence in the dollar; it may do some combination of both. Either way, it appears very likely that what government officials truly want for the Russian economy will not be executable from a practical standpoint. To the extent that this is the case, no matter what the government does to address the broad array of economic challenges it faces, it will inevitably fall short of getting it 100 percent right. But regrettable outcomes can be minimized if the right questions are asked and courses of action are determined more on the basis of rationality than on catering to semi-informed politically palatable outbursts.
Lots of hemming and hawing from El Maestro (see final paragraph) but not many definitive statements.
"The more colloquial way of saying this:" What's your point?
I think he is trying to put this in words that even you could understand...
Well then, I must really be stupid because I'm not sure I understand what point he (Mr. El Maestro) is trying to make exactly. Do you?
.... and by the way, what's with all this anonymous crap with you anti-Putin folks.
First La Russophobe and now El Maestro. You guys take yourselves awfully seriously.
Timothy, as our last conversation here made apparent, foreign exchange policy, particularly for Russia, is influenced by a wide variety of inputs. So there are several purposes to this post, but the most important are these:
1. Given the range of inputs influencing how currencies are discussed, traded and regulated, I aim to provide a single place where the relevant facts are collected for readers of this blog who have a stake in the way Russia carries out its foreign exchange policy. The incredible politicization – to say nothing of the infantilization – of this topic makes fact-based analysis all the more vital. It is therefore my aspiration to discuss Russia’s currency issues in as detached and as sophisticated a manner as I am capable.
2. Specific to the concluding thoughts of the post, I direct you back to our previous conversation: what any government’s officials say is not necessarily what those officials will end up doing when push comes to shove regarding currency policy. For anyone predisposed toward any particular interpretation of that statement as it regards Russia, I ask that both sides be considered: officials may turn back on their support of the dollar and/or they may turn back on their pledge to buy IMF bonds. And neither outcome should surprise us. As a matter of fact, if anything, their rhetorical hedging on this issue certainly sets them up to do either and then credibly claim that they have put their money where their mouths are. Hence the title of this post: Talk vs. Action.
As for definitive statements, I am hoping that any reasonable person would read this posting and see without any difficulty a number of definitive statements from me. Whether or not they are the sorts of statements you want or expect to see me write is another matter entirely.
As for Putin, I personally am neither for nor against him. He is what he is, and that’s that. I’ve never met the man and I do not consider it my place to use this blog as an outlet for spouting off half-baked tirades that have the precision of an out-of-control garden hose. I do however find Russia a fascinating culture and where that intersects with my grounding in finance and economics I hope will provide readers with a perspective on modern Russia that they may not normally be accustomed to.
As for taking myself seriously, I actually chose the nom de plume “El Maestro” with exactly the opposite intention. If there really is no part of you that finds that the least bit funny, then perhaps it is you who is taking things too seriously.
By the way, from our previous comment thread, I meant to say, your assertion that the dollar faces “death by a thousand cuts” – I couldn’t agree more and actually really like that way of phrasing it. But as we noted, the hitch is how long those 1000 cuts take.
Ok, so we're back to where we started.
Namely, the US Dollar has a bumpy road ahead of it but there is still little consensus on when it will, if ever, relinquish its place as the reserve currency of choice- 1 year, 10 years, 100 years.... nobody knows. Fair enough.
Additionally, you are tired of all the "white noise" emanating from the media in response to proclamations from government officials around the world on this topic. Your point, correct me if I'm wrong, is that the time has come to "fish or cut bait" (as we say in Boston), "put up or shut up" (as they say in New York), or "sheet or get off the pot" (as they say in Houston). Fair enough.
Lastly, why then the anonymity? I agree with you that talk is cheap and, in particular, when delivered from the comfort of a pseudonym. Robert and James don't feel the need; what makes you so special.
Lighten up.
@El Maestro "Lighten up"
I'm working on it every day in the gym. Did 5,000 meters on the erg yesterday.