Ruble in Trouble; Russia Raids SWF Soon?

Sorry, Vlad, but your currency is more worthless than the dollar right about now.

No, no, it's not what you may think--Russia may raid its sovereign wealth fund, AKA stabilization fund or rainy day fund, soon. To be precise, it's the "Russia Direct Investment Fund." But first, a little bit of background from current events: new and recent EU sanctions have sent the Russian ruble tumbling to all-time lows. Whereas US sanctions had limited direct effect on Russian trade, EU sanctions have hit it squarely in the gut since the grouping is Russia's largest trading partner:

Russia's currency dropped to an all-time low against the dollar on Tuesday as investors fret about long-term economic damage from Western sanctions...The Russian currency fell more than 1 percent to 38.80 rubles against the U.S. dollar by noon Moscow time Tuesday. The ruble has lost over 2.7 percent in just two days...

Economist Alexei Kudrin, who served as finance minister under President Vladimir Putin for 11 years until 2011, said Tuesday that the sanctions could send Russia into a long recession. "The sanctions that have been imposed are going to have an effect (on the economy) for the next one or two years because they have limited opportunities for investment in this uncertain environment," Russian news agency Interfax quoted him as saying...

Capital flight is taking off anew amidst all this economic uncertainty. Certain Russian geniuses even manage to cut off their nose to spite their face by banning EU agricultural imports which the country does not produce in significant amounts:

Market jitters were further fueled by reports that the Russian government is preparing more retaliatory import bans, which could ultimately hurt Russian consumer spending. Russia in August banned imports of dairy products, meat and vegetables from the EU and the U.S., causing price hikes for some items.

Amid the uncertainty, investors continue to pull money out of the country at an accelerating pace. Experts like Kudrin predict some $110 billion could be withdrawn this year, almost twice as much as last year's $61 billion.

What's a developing country to do? First, Russia is reportedly protecting the SWF against Western sanctions by reincorporating the fund into the central bank. Ironically, some of the investors in Russia's SWF are the very same countries applying sanctions against Russia. Strange but true:

Russia is preparing to transfer the ownership of a $10 billion sovereign wealth fund to the central bank from a sanctioned [Western sanctions] state-development lender, according to two people with knowledge of the plan. Russian Direct Investment Fund’s co-investors, which include sovereign funds in Europe and Asia, are concerned that sanctions may affect their investments in Russia if the state lender controls the assets, according to one of the people, who asked not to be identified because the information is private.

The fund, created in 2011 to stimulate investments in privately held businesses and wean the state off its dependence on commodities, has secured the backing of funds including France’s Caisse des Depots et Consignations and Japan Bank for International Cooperation and last year hired Goldman Sachs Group Inc. as an adviser. Penalties over Ukraine have led Russia to invest in state-owned lenders VTB Group and Russian Agricultural Bank, whose access to international funds has been curbed, and the measures may also impede co-investors from dealing with RDIF.

Next, having secured access to RDIF away from Western sanctions and possibly freezing, I suppose there's no "rainy day" for Russia like today. With oil prices falling besides, "stabilization" is certainly on the cards. Net result? Don't bet against Russia raiding RDIF soon:

[T]he Finance Ministry is allowing, if the need arises, for the possibility of taking funds from the sovereign wealth fund next year for the first time since the aftermath of the global crisis. The Reserve Fund, which collects windfall oil revenue and was set up to cover budget shortfalls, stood at $91.7 billion as of Sept. 1.

"To ensure the unconditional fulfillment of all of the obligations in 2015, in a situation if federal budget revenues come short … the government will have the right to direct the resources to fill the shortfall of up to 500 billion rubles from the Reserve Fund," the Finance Ministry said in the budget.

Economists have warned that once the government starts digging into the stash, it can be depleted within around a year if Moscow is hit with more punitive measures by the West and if oil prices drop significantly.

Let's just say Russia will be in for a fairly severe test over its actions in Ukraine soon. While Putin's macho man act against Western sanctions may win plaudits at home in the meantime, we'll see whether the same holds in a few months' time when the combined force of sanctions--devaluation, recession, etc. hits.