Wednesday, December 31, 2014

"China Plays Long Game With Ruble Deal"

From Barron's Up and Down Asia:

Beijing bolsters global currency ambitions as Russia swap agreement challenges central role of U.S. dollar. 

What new devilry is this? While all of Christendom was recovering from a day over-indulging on eggnog, figgy pudding and antics worthy of that new quadcopter drone, China was busy extending its financial tentacles. On Dec. 26, the currency boffins at the People’s Bank of China announced that, starting this week, they would begin allowing the trade of derivatives for companies and investors to bet on the exchange rate between Russia’s ruble and China’s currency, the yuan, with no U.S. dollars between them as chaperone.

Conspiracy theorists weren’t so besotted with Yuletide cheer that they didn’t sit up and cry foul. This, they bellowed, was a clear instance of China stepping in to lend a helping hand to its old Cold War comrade and prevent Western sanctions (and cheap Saudi crude) from breaking Russia’s back. And just when they seemed so close to convincing Moscow into pushing its proxies in eastern Ukraine into a peace deal and its Middle-Eastern puppet Syria to the negotiating table, too. 

The derivatives deal comes on the heels of an October agreement allowing Russia’s central bank to borrow up to 150 billion yuan ($24.4 billion) using swap agreements. Some commentators called that deal a lifeline to Russia as the ruble slid. The Russian currency has lost half of its value this year, forcing Moscow to take extreme measures to avoid a balance of payments crisis, including raising the benchmark interest rate to 17% and ordering Russia’s biggest exporters to cash in their dollars for rubles.

It may therefore seem like Beijing is trying to turn Russia’s crisis into its own opportunity -- to sew a silk purse from Moscow’s ear. But the Chinese panda may not exactly be scratching the Russian bear’s back here. Opening up a credit line in yuan to Moscow doesn’t begin to solve Russia’s immediate problem: oil prices are too low relative to its imports and overseas debt. Unless Russia can substitute trade with the West for trade with China, the balance of payments risk remains as long as the ruble is in free-fall. All the yuan in the world can’t help Russia if it runs out of dollars....MORE