Russian / US Escalation and the Financial Crisis

[oddlots]

I'm troubled by the following converging events:

1) - EJ has suggested very plausibly that Russia might see a run on its currency.
2) - The US is, to my mind, putting Russia in an impossible position. Not the constant baiting and its encirclement with bases. I mean the missile defense systems to be installed in the Czech Republic and Poland. From what I've read this gives the US a first strike capability, basically wiping the Russian military off the world stage and rendering Russia powerless to determine its future. (Strategically an unthinkable outcome to any player and one that requires the most vigorous response possible.)
3) - Russia holds a significant amount of agency paper and treasury paper at a time when a) its value seems almost certain to fall and those first to sell benefit most b) it faces a possible run on its own currency which gives it ample motivation to break ranks and defend its currency at the the expense of its antagonist c) the US requires even more indulgence of its foreign lenders while being able to offer progressively less (short to medium term) to these creditors.

Missiles go in. Russia dumps. Or, west doesn't back down, Russia dumps.

I've spent the last 4 or 5 years getting familiar with the sorts of unstable equilibriums that dollar hegemony relies on. I can see why its held together even with a lot of stresses. I don't think I've ever seen a situation so prone to centrifugal forces as this and so worrying because its plausibly the point where the finance conflagration touches the house of geo-politics and the neighbourhood goes up in smoke.

Anyone else share the concern?

[ASH]

Re: Russian / US Escalation and the Financial Crisis

2) - The US is, to my mind, putting Russia in an impossible position. Not the constant baiting and its encirclement with bases. I mean the missile defense systems to be installed in the Czech Republic and Poland. From what I've read this gives the US a first strike capability, basically wiping the Russian military off the world stage and rendering Russia powerless to determine its future. (Strategically an unthinkable outcome to any player and one that requires the most vigorous response possible.)

I think Russia may be making that calculation, although I don't think the missile defense bases in Eastern Europe are an essential part of the equation. A missile defense system that did not include Eastern European bases could still pose a threat to Russia's deterrent.

Be aware that it isn't an open-and-shut case. The first strike scenario in The Rise of US Nuclear Primacy is contingent upon Russia's submarine missile forces and early-warning radar and satellite constellations staying in disrepair. Now that Russia has ready cash from energy exports, they're not really in a corner. If they can keep a few boomers at sea reliably and their early warning system functional, then a successful American first strike is pretty much out of the question. Add to that a modest budget to upgrade their missiles (e.g. with decoys and maneuverable reentry vehicles) and they can stay ahead of American missile defense systems more-or-less indefinitely. It's much cheaper to make warheads difficult to detect and hit than it is to make a working interceptor. Missile defense is only something you can pull off against an adversary who is far less than your peer in terms of technical skill and funding.

That said, although I think Russia isn't in a very tight corner here, I do not at all discount the possibility that the Kremlin sees things differently. In my opinion, both America's limited missile defense program and the expansion of NATO can legitimately be viewed as unfriendly by Russia, and increase risks of the sort you identify.

[D-Mack]

Re: Russian / US Escalation and the Financial Crisis

It's quite interesting to watch history live.

Russia has to react and they do by putting bombers into Venezuela, for example

Summary
Two Russian Tu-160 “Blackjack” strategic bombers reportedly landed in Venezuela on Sept. 10. If this is a Russian military foray into the Caribbean, it will be the first since the Cold War. The move also give Venezuela an opportunity to annoy the United States by letting Washington's old Cold War rival operate from its territory, in the United States' backya
http://www.marketoracle.co.uk/index....ticle&sid=6213

Russia sending navy to Venezuela

Russia has said it is to send a heavily armed nuclear-powered cruiser to the Caribbean for a joint naval exercise with Venezuela in its first major manoeuvres close to the United States since the Cold War.
http://english.aljazeera.net/news/eu...343814320.html

And now state TV is going to show a 911 truth movie, this is not good for the US image, which is not that great to the surprisement of Brzezinski

In an interview with German news agency dpa, Chiesa, a European parliamentary deputy, said Russian television is to give prime time airing to his film on the eve of this week's seventh anniversary of the attacks in New York and Washington.

"That means that some 30 million Russian citizens will learn the truth about what happened, which is a very big result for me."
http://www.dw-world.de/dw/article/0,...626100,00.html

Engaged in our conversation, Brzezinski completely forgets about our 15-minute time limit.

“Don't you think the younger generation of Russians has a much warmer attitude toward American?” he asked toward the end of the conversation.

“No, it seems to us that the young have an even worse attitude toward America than those over 30.”

“That can't be. I hope you are wrong. Write me, please, later and tell me what the reaction to this interview is, okay?”
http://www.kommersant.com/p869470/U....ign_relations/

[c1ue]

Re: Russian / US Escalation and the Financial Crisis

I've asked EJ to expand on his short statement concerning a predicted run on the ruble.

As I noted in my question - Russia today is not the Russia of 1998.

Only a protracted drop in oil prices would empty out Russian reserves as happened previously.

Secondly in 1998, foreign ownership of Russian stocks/bonds was 3x the Russian putative trade surplus.

This ratio is more like 0.1x this time around, although the foreign DIRECT investment is 0.5x - then again, direct investment is usually things like factories and buildings which are much harder to move.

I do agree that there are significant economic danger signals in Russia - the housing bubble has gone past outrageous and interest rates/inflation are both high.

But the small interventions the CBR (Central Bank of Russia) has been undertaking to keep the ruble relatively stronger is more an effort to combat inflation via currency depreciation than any attempt to hold 'hot money' flows in.

Russia does still import a tremendous amount in the way of consumer goods.

All in all, I don't see a smoking gun for the currency run: foreign money is no longer the primary driver in domestic investment; Russia doesn't owe that much money anymore as a ratio to their income; income is still very heavily commodity and energy dependent, but I just don't see a return to 1999 price levels.

As for dumping their agency/Treasury holdings - Russia doesn't have THAT much. A few billion, but not anywhere near the trillion plus in China nor even the UKs levels.

[VIT]

Re: Russian / US Escalation and the Financial Crisis

I would add one additional fact which makes the difference between Russia 2008 and 1998. I just returned from Russia and had some conversations with people in business. The taxation efficiency in terms of coverage is much better right now then it was even 5 years ago. So even we see some rubble depreciation today I believe it should be relatively stable in short and mid-term.

The real problem is long term since the trade surplus constantly diminishes and inefficient oil&gas sector does not grow. It sounds ridicules but it is a kind of gas shortage in Russia and huge problems with electricity generation.

Regarding stock market I do not see how it might affected Russian economy. It does not have the same features as stock markets in US and Europe. Probably only on borrowing side for banks and companies.

But I am worried since converted some dollars to rubbles recently and wanted to exchange real estate in Russia to Texas. Now it does not look good and I am kind of waiting where we go next.

[VIT]

Re: Russian / US Escalation and the Financial Crisis

If Russia would like to try to dump the US currency I would wait until the elections. This threat could be used as negotiation card with new US government. Even if the holding is small it might be a trigger. But without China and/or Asia it is hard to see as a real threat.