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I started this as a reply to a post, but it was, even simplified, too long.

I would have preferred more people read this, and now less will. On the other hand the people who do read it may really read it.

My basic thesis is than a lower ruble will help a very, very few a lot but it will hurt many, many more. Why is that bad for Putin? Well, it's a lot easier to bully, cajole, frame, intimidate or justly try a few people that have unseemly much to lose than it is to explain to millions why life is worse and harder.

Since this will never make a list enjoy the dance of the mating fluke worms before I continue.

So, I'm going to try to use as little math and simplified scenarios to make this diary as understandable as possible. Please do not take that for me being brilliant and you dim. Some people are good at mat, but some aren't; that doesn't mean they are stupid. Some people are familiar with economics, some aren't.

Ok, let's say a US dollar (USD) is worth 10 Russian rubles (RUB). Actually it's about 1 USD = 36 RUB right now but that just makes the math more complicated.

So what happens when a USD is worth 12 RUB? (For simplicity's sake we will pretend only the two currencies mentioned exist, but the same holds true for a RUB falling the same amount against a basket of currencies - as is now the case.)

Well you have to look at several things; imports, exports, tourism, foreigners who own Russian assets or debts in RUB, and Russians who owe debts in foreign currency or foreign assets. There are secondary consequences of course, but one step at a time.

A) Imports and exports

Take exports (from Russia). These will command a higher RUB price than before (assuming a world price, which since most Russian exports are either oil and gas - 60%, metals or military hardware is in fact the case). This will mean higher profits so long as some or all of the costs are in RUB. Say a company had a profit of 11% on sales of 100 million USD that was 10 million USD before. But now costs aren't 900m RUB/10 but 900m RUB/12. No need to do the math, obviously costs go down; since income is the same, profits go up. So this is a good thing for Russia's major exporters. If you do do the math profit goes up by roughly one and a half times.

Now, let's take imports. Well, assuming the foreign companies or importers maintain their profit margins, prices go up. A 10 USD pair of jeans is now 10x12 = 120 instead of 10x10 = 100. Prices go up 20%. Now because most of Russia's imports consist of consumer goods (for which Russian made alternatives are not really an option) and food stuffs (world price again), price increases would roughly reflect the ficticious numbers I've plugged in concerning imported goods.

So secondary consequences: Russian exporting companies employ a small minority of Russian workers, far fewer than the number of Russians buying foreign goods, whether that be chicken livers from the US, jeans from China or champagne from France. Even if the exporting companies paid all the extra profit to average workers [Would. Never. Happen.], most Russians would still be worse off. Theoretically Putin could tax away these extra profits and then redistribute them, but assuming 100% efficiency, it would end up just like before. But when have you know humans to do anything with 100% efficiency, let alone in a country ranked co-127th in's corruption index.

B) Tourists

Strictly speaking, this is just another import/export , but since foreign travel is not perceived as such by most people and it is a major expense for most people, I thought I would mention it separately. Now a Russian travelling abroad used to pay 100 RUB for a 10 USD pizza, now they pay 120 RUB. An American used to pay 72 USD for a 720 RUB hotel room, but now just 60 USD.

While statistics for visitors to Russia are easy to come by (25m worth almost 12b USD), and the number of Russian visitors to other countries like wise (just over 40m), how much Russian tourists spend abroad is hard to pin down [Neither number represents unique visitors, many people will make multiple visits]. But that's not the point. Almost none of those however-many-people who pay less for their visit Russia get to support Putin. All of those who make 40m trips abroad and who have to pay more, live and work and vote in Russia. Most of them are middle class, the last people - for better or worse (I'm not saying that's fair or just) - a leader wants to piss off.

In all of the above cases average Yuri Shmurinov (aka Joe Shmoe) ends up losing out.

C) Russians owing money in USD

This is a big one. Almost three quarters of Russian debt (570b USD) is owed in foreign currency. Now some of this is owed by companies paid in USD. They are fine. But if you as an individual or as a company earn in RUB but have to pay in USD your debt just jumped. Say you used to owe 10,000 USD. Well that was 100k RUB. Suddenly you owe 10,000x12 = 120k RUB. You owe 20% more overnight. Again, breakdowns are hard to come by, but if even a third of that foreign currecy debt (140b USD) is owed by entities or people whose income is in RUB, that's a serious problem. For the economy and for Putin. Again a government bailout is theoretically possible, but apart from rampant corruption, the markets would react very differently to say an American, EU or Japanese bailout. Who wants to be owed money by a government that de facto annexes parts of other countries and faces sanctions, however minor?

D) Foreign ownership of Russian assets including debt in RUB

Again, suddenly what was worth 100,000 USD at 10 RUB per USD is now only worth 82.500. If you are a bank that has impacts on your Basel-formula for minimum capital. If you are a company, it means your share price suffers.

E) Russians owning assets abroad

This is another small group of winners. But only if they gain more from these assets than they lose in points A (imports) through D. The math: Their 10k USD in stock just went up 20% in RUB - assuming stock prices stayed the same.

Secondary consequences, part two: Since most people are worse off after the devaluation (it's basically a hidden pay cut), they will want higher wages (I would too). But the higher wages then cause higher costs for business, which means higher prices for domestic goods and an even lower exchange rate. It's a vicious circle of inflation, higher price and wages, more inflation etc. with the nasty side effect of high interest rates. Who is going to loan anyone money for two or five years - let alone twenty so you can buy a house - at a fixed rate if they don't know whether inflation might spiral out of control? Who would borrow at a variable rate if interest rates might double in a week? No one. So everyone resorts to forreign currency lending, which makes thinks even more precarious.

Originally posted to BelgianBastard on Tue Mar 04, 2014 at 02:07 PM PST.

Also republished by Community Spotlight.

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Comment Preferences

  •  Russia run for sake of people who don't use rubles (4+ / 0-)

    Russian oligarchs do business in dollars, pounds, and euros.  They couldn't care less about the condition of the ruble.

    As ordinary Russians get desperate, they move right.  Also good for oligarchs.

    Domestic politics is the continuation of civil war by other means.

    by Visceral on Tue Mar 04, 2014 at 03:07:07 PM PST

    •  Russia is run for the sake of Putin (3+ / 0-)

      Just ask Khodorkovsky or any of the Oligarchs who have fled the country.

      What Putin's ambitions are about I'm not sure, I doubt they are good for anyone but Putin. I even doubt that.

      The Oligarchs obey, tumble or flee. The same goes for the average Russian. It's not just the Pussy Rioters.

      But thanks for your comment and feel free to tell me how I am wrong.

      I ride the wild horse .

      by BelgianBastard on Tue Mar 04, 2014 at 03:43:42 PM PST

      [ Parent ]

      •  I wish our own oligarchs would flee the country. (1+ / 0-)
        Recommended by:

        Do you think the sanctions currently being proposed would hurt the Russian economy as much as US-prescribed "schock therapy" hurt the Russians in the 1990s?

        •  False Question (1+ / 0-)
          Recommended by:

          I'll still answer.

          So far, no sanctions have been enacted. Markets have legitimately reacted to events, resulting in a lower value for the ruble. And while I have a Hefty bag of stuff to say on the subject, this diary is about the drop in value of the ruble.

          I ride the wild horse .

          by BelgianBastard on Wed Mar 05, 2014 at 01:11:10 PM PST

          [ Parent ]

  •  Additional factor (9+ / 0-)

    One of the consequences of D) is to make investment in Russia less attractive to foreign investors.

    A further consequence, especially if Putin tries to use the threat of a cut-off of gas supplies, is the lack of confidence in Russian ability or willingness to abide by contracts and agreements. This has already been undermined by the breaking of the provisions of the Budapest Memorandum.

    What Putin has done is to undermine the Russian economy for decades to come as foreign investors throttle back their investments in what should be a self-sufficient country - not only in terms of extracting raw materials but to produce all the things that you mention are imported. In fact, it's even worse than that. What will also be put off investing are the very companies that could exploit the lower wages in manufacturing as the appeal of China reduces with their wage rises now meaning companies in the west are starting to "on-shore" production.

    "Come to Sochi, visit the gay clubs and play with the bears" - NOT a Russian advertising slogan.

    by Lib Dem FoP on Tue Mar 04, 2014 at 05:03:07 PM PST

  •  Owning abroad benefits only if (1+ / 0-)
    Recommended by:

    The dollars are converted back to rubles.....and why would that happen?  There was a reason the money went abroad and it was to get it out of Russia. That hasn't changed.

    The dossier on my DKos activities during the Bush administration will be presented on February 3, 2014, with an appendix consisting an adjudication, dated "a long time ago", that I am Wrong.

    by Inland on Wed Mar 05, 2014 at 05:02:57 AM PST

  •  Some of us are good at mat, (3+ / 0-)
    Recommended by:
    Nag, FindingMyVoice, FarWestGirl

    Some of us are good at spelling;)

    The GOP should not be allowed to object to NEA funding after their 24 billion dollar theatrics.

    by sap on Wed Mar 05, 2014 at 07:44:01 AM PST

  •  A couple things (2+ / 0-)
    Recommended by:
    BelgianBastard, FarWestGirl

    First, tourism to Russia is probably going to take a hit whether it's cheaper or not as long as there is tension in Ukraine and Russian troops are a part of that. So I doubt they'll benefit from the increased buying power of foreign currencies.

    The other is that Russia runs a pretty significant trade surplus because of all of their exports. I doubt that this surplus helps the common folks much currently, it goes pretty uniformly to the oligarchs, so I'm not sure how increasing the trade surplus, which is what will happen with a devalued currency, will mean less money for the poor folks.

    All in all, I agree that a devalued ruble isn't especially good for Russia, but I wonder how much that translates into being bad for Putin and his power base. If it continued to stay at a lower level, or drop more, for a significant amount of time then I'd expect that it might have some negative effects for Putin, but as it is there is no reason to expect this drop to be long term. Sanctions on Russia are very unlikely, and there's no economic reason for the drop, just a short term political reason.

    If knowledge is power and power corrupts, does that mean that knowledge corrupts?

    by AoT on Wed Mar 05, 2014 at 11:16:35 AM PST

    •  Thanks AoT (2+ / 0-)
      Recommended by:
      AoT, FarWestGirl

      Yeah, tourism to Russia will suffer for sure, as you said.

      And yes, Russia does run a trade surplus, but almost all of it's exports are in hydrocarbons and metals. Throw in military exports and you are at 80-90% of exports. I never suggested that a ban or sanctions would hurt Russia or it's exports. It probably wouldn't. I only said that  a lower ruble would hurt more people than it helped.

      As for whether this drop of the ruble is temporary - we'll see. But I doubt any backtracking by Putin would fix the doubts the markets have.

      I ride the wild horse .

      by BelgianBastard on Wed Mar 05, 2014 at 12:51:48 PM PST

      [ Parent ]

      •  I just don't see what the reason (0+ / 0-)

        for a permanent drop would be. The ruble isn't actually worse off in any significant way that I can tell. And the exports will continue to be strong so it seems like it would be easy money if the ruble stays low. Monetary values aren't completely arbitrary.

        If knowledge is power and power corrupts, does that mean that knowledge corrupts?

        by AoT on Wed Mar 05, 2014 at 01:29:50 PM PST

        [ Parent ]

        •  Ok, this is a whole other diary's worth (1+ / 0-)
          Recommended by:

          Uber-short version:

          A currency's value depends not only on trade but the current account balance (trade + net investments - to put it into a few words). This will likely stay well in the black. So that supports your view, not mine. But for a currency to have value against other currencies, someone has to be willing to buy it. For the foreseeable future, if Russia continues on this path, no one (excepting Crimea) will want to own rubles.

          I ride the wild horse .

          by BelgianBastard on Wed Mar 05, 2014 at 01:59:39 PM PST

          [ Parent ]

  •  The challenge (2+ / 0-)
    Recommended by:
    AoT, BelgianBastard

    The one thing Putin is not is a Soviet-style leader.

    This is all for domestic consumption (not to mention all those new pro-Putin voters in the E. Ukraine and the Crimea).  Remember that Putin is a conservative and has a conservative base.  Conservatives are all about feelings, "gut instinct", and anecdote -- no wonder Bush liked what he saw in Putin.

    Thus, macroeconomic considerations are not a good predictor of Russian behavior, just as economics doesn't explain the behavior of American conservatives.

    •  Not sure what to make of this... (2+ / 0-)
      Recommended by:
      bluezen, liberaldregs

      Soviet leader were generally conservative, Stalin especially.

      That aside, yes, Putin is a conservative - I would use the term reactionary. And yes this is for domestc consumption.

      Still, I don't think your points about macroeconomics apply to this diary or to conservatism in general, for that matter. Putin may not care, I'm saying he should.

      Thanks for the comment, though. I'm sure you could reformulate it and maybe poke more holes in this diary or my opinions.

      I ride the wild horse .

      by BelgianBastard on Wed Mar 05, 2014 at 01:36:56 PM PST

      [ Parent ]

      •  Of course he SHOULD... (0+ / 0-) about macroeconomics.  But just like his soul-staring pal Bush, he doesn't.  And he'll ignore reality until the rest of Russia's influencers  (e.g., the plutocrats, the white Russian mob, etc.) decide that it's getting out of hand.

        •  Putin is playing with fire. (0+ / 0-)

          And I'm talking about domestic factors.

          People still get to vote in Russia. The Oligarchs, the rest of the one percent, the (upper-)middle class... none of them wants to move towards isolation, politically (especially visa bans and restrictions) or economically. What they want even less is seething masses.

          I ride the wild horse .

          by BelgianBastard on Fri Mar 07, 2014 at 12:30:31 PM PST

          [ Parent ]

    •  ::snort:: Bush was an idiot who had no idea what (3+ / 0-)
      Recommended by:
      siduri, bluezen, BelgianBastard

      he was seeing. And Putin sure as hell didn't show him anything real.

      Information is abundant, wisdom is scarce. ~The Druid.
      ~Ideals aren't goals, they're navigation aids.~

      by FarWestGirl on Wed Mar 05, 2014 at 03:38:11 PM PST

      [ Parent ]

  •  Why do not the Ukraine shut down Russia oil tap (0+ / 0-)

    The main tap flow into from Crimea,and branches out all over Ukraine to other countries  , headed to their final destination , did Putin invade to head off a block of flow of  Russia oil

  •  Kerry should not be sending a false signal (0+ / 0-)

    Too the people of Ukraine ,only 26 percent  of  American care  what happen in  Ukraine and 73 percent of Russian do not support Putin invasion of Ukraine,giving people false hope can sometime lead too tragic result

  •  I agree with you (2+ / 0-)
    Recommended by:
    BelgianBastard, Andrew Lazarus

    but I don't get the impression that Putin cares who he hurts.

    Also, you are attempting to apply logic to crazy. Do yourself a favor, and don't bother- it just leads to headaches.

    Great Post! I love how concisely you articulated your points.  

    •  Thanks. (1+ / 0-)
      Recommended by:

      Nice comment too :-)

      But Putin isn't crazy, and he cares about staying in power, that's clear because he has been very careful about making sure he did. But that's a discussion for other diaries. Suffice it to say I am no fan.

      I ride the wild horse .

      by BelgianBastard on Wed Mar 05, 2014 at 05:50:50 PM PST

      [ Parent ]

  •  Russia is threating U.S. dollar dumping U.S. debt! (1+ / 0-)
    Recommended by:

    Russia is threating abandon the U.S. dollar and start dumping U.S. debt!

    Glazyev also stated that Russia could start dumping U.S. debt and encourage other nations to start doing the same.  The following comes from a Russian news source...

    "We hold a decent amount of treasury bonds – more than $200 billion – and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner," he said. "We will encourage everybody to dump US Treasury bonds, get rid of dollars as an unreliable currency and leave the US market."
    This is where the U.S. is today—nowhere ….
    •  The US is not nowhere... (2+ / 0-)
      Recommended by:
      Andrew Lazarus, FG

      US bonds yield less than a savings account.

      This threat is empty. I suspect it's an excuse to try and raise the level of the ruble; sell dollar assets for dollars then use those dollars to buy rubles, so the ruble rises.

      Thanks for your comment.

      I ride the wild horse .

      by BelgianBastard on Wed Mar 05, 2014 at 06:03:20 PM PST

      [ Parent ]

  •  But let's just say that you're a close (0+ / 0-)

    friend of Putin, or Putin's secretary or maid or brother-in-law, etc.  And you get the whisper ahead of time that he's going to do something that screws up the value of the ruble.  You can get Gordon Gekko rich overnight by selling ruble futures.  Likewise, if you get the whisper ahead of time that Putin's going to deescalate in the Ukraine, you can buy ruble futures and get Bill Gates rich overnight.  

    So it's a good idea to suck up to Putin and be the loyalest of his loyal hangers-on if you want to be on that inside.

    •  To make money on the futures market... (0+ / 0-)

      Someone has to agree to be one the opposite side of your trade.

      So if I want put options for rubles at the current rate, someone has to think the ruble will rise. I doubt anyone took that bet in large amounts. This crisis was brewing for months.

      But thanks, this was a good point if you are not too familiar with markets in these types of things.

      Anda good idea for a diary.

      I ride the wild horse .

      by BelgianBastard on Fri Mar 07, 2014 at 12:37:55 PM PST

      [ Parent ]

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