WSJ: The Financial Bungler in the Kremlin

http://www.wsj.com/articles/the-financial-bungler-in-the-kremlin-1457565147

Who’s the world’s worst investor in the past 18 months? Look no further than Russian President Vladimir Putin. He has been long and wrong with a giant energy portfolio and controls too many commodities. Plus he has tons of debt and a currency bet that has gone so bad his nickname should be Vlad the Impaler. And he may take down the Russian Federation with him.

Oil has cratered so badly that it needed a modest bump in the past couple of weeks to get its nose above $38 a barrel, still way down from $50 a year ago and $105 in June 2014. A slip back into the 20s is entirely possible. Energy is almost a quarter of Russian GDP. The Russian state owns three-quarters of the oil company Rosneft (40% of Russian oil output) and just over half of natural-gas producer Gazprom. The company is now worth under $50 billion, about half its value 18 months ago and down almost 85% since June 2008, when Gazprom was worth $344 billion, according to the Financial Times. By contrast, Exxon is down 24% over that period.

The Russian ruble has been falling like a sack of potatoes. It is 71 to the dollar, down from 34 in mid-2014—doubling the price of imports. When the ruble lost value in late 2014, the government intervened in currency markets, selling dollars from their reserves and raising interest rates to 17%. The ruble rose to 50 to the dollar, but after blowing through over $80 billion in foreign currency to stabilize its own, the government stopped protecting the ruble. This led to the current free fall. Interest rates are now 11%, but according to the Central Bank of Russia, inflation last quarter was 12.9%.

There is some good or at least not-bad news. According to the Central Bank, as of January 2016, Russia’s external debt, money owed to creditors outside of Russia, was $515 billion. Down from $733 billion in mid-2014, it is moving in the right direction. And perhaps only 20% to 25% of that debt is current, meaning payable in 2016. Government foreign reserves as of January 2016 were $371 billion, with $51 billion in gold. They’ve been chewing through these reserves over the past two years, but if they lay off currency trades, on paper it looks like they’ll survive.

But Central Bank data also show that 83% of Russian debt is denominated in dollars or euros. Every day the ruble drops in value, the debt owed goes up. This hurt Russia and Asia in the late 1990s, but the former didn’t learn.