Our translation of an article from Ria Novosti follows. Commentary by Vince Dhimos.
It is noteworthy that the sanctions against Russia actually had a beneficial effect, inducing Russia to pay off loans that it may otherwise have held on the books a bit longer. It is amazing that if you take into account the gold reserves, Russia can be said to have zero public debt because the debt is 100% offset by these reserves. No other world power can make this claim.
Russia was smart to keep its outstanding credit low, in contrast to China, which could be setting itself up for a jolt if the economy sags. This has helped the rouble stay stable. As a result, investors are clamouring for Russian bonds, which have made gains lately.
Even as the West dabbles in all sorts of experimentation, from money printing to blowing stock market bubbles, Russia sticks to old tried and true economic fundamentals that have always been a prerequisite for a stable and growing economy.
Reverse effect: the United States helped Russia save $450 billion
MOSCOW, Feb 19 - RIA Novosti, Natalia Dembinskaya. While Washington is preparing new sanctions against Moscow, the United States came to unexpected conclusions. Impressive international reserves of Russia, exceeding the entire external debt of the state, are largely thanks to the American and European sanctions. The share of borrowed funds in the economy is minimal, but free capital has significantly increased. Since the country has insured itself against sanctions risks, why can it easily redeem all debt and why are so many reserves needed? By RIA Novosti.
Why we need reserves
By February, the volume of foreign exchange reserves (gold reserves) of the Bank of Russia was estimated at 475 billion dollars. This is noticeably more than total public debt (453 billion) and is almost three times the standard recommended by the IMF.
International reserves are highly liquid foreign assets held by the Bank of Russia. They are used to finance the balance of payments deficit, to influence the exchange rate of the currency through interventions, to maintain confidence in the currency and the economy of the country, and also as a basis for foreign borrowing. Gold reserves consist primarily of assets in foreign currency and monetary gold.
Their accumulation was promoted by a fiscal rule: all oil and gas revenues exceeding the budgeted base price of oil at $ 40 per barrel were sent to the treasury. This is despite the fact that last year Brent crude barrel cost an average of about 70 dollars a barrel.
In 2014, the Central Bank conducted foreign exchange interventions to support the rouble and save the economy from the effects of the economic crisis. As a result, reserves decreased immediately by 25%.
But since 2015, stocks have been being replenished. Since February of last year, reserves have been replenished by $27 billion. These rates are among the highest among the world’s largest economies.
Central Bank consistently pursues this policy. Not surprisingly, sanctions pressure is increasing and Russia is more actively building up the safety cushion.
Moreover, the growth of the gold and foreign currency reserves of the country is not only due to the fiscal rule and relatively high oil prices. Paradoxically, American and European sanctions helped.
“Because of the sanctions, the largest banks and oil companies of Russia could not renew loans of Western banks. Therefore, they paid off debts as they matured, thereby reducing the share of borrowed funds. The result is an accumulation of free capital,” notes the influential American newspaper The New York Times.
This can be regarded as a negative factor indicating a decline in economic activity in the country and a slowdown in the investment process, the publication continues. However, as economists point out, there is simply no urgent need for foreign loans, since Russia is one of the least indebted countries in the world. Over the year, the state’s external debt has decreased by almost ten percent.
A solid amount of gold reserves insures against sanctions risks, maintaining the safety margin of the national economy. It is especially important that the reserves entirely cover all foreign debt. That is, the Russian Ministry of Finance can pay it off any time it needs to.
Gold instead of dollars
Over the past ten years, the structure of Russian reserves has changed significantly: investment in US Treasuries has decreased to a minimum, but the share of gold has increased tenfold - to $90 billion, or 18% of total gold reserves.
From the standpoint developing a financial system, there is no alternative to gold. This is protection against currency risks, and insurance against sanctions, and, of course, the opportunity to earn. Any currency, whether it be dollars or euros, is heavily burdened with debts, and in the long run, debts can result in write-offs. In the event the dollar system should collapse, gold will definitely retain its value.
There is less and less trust in the dollar. The Central Bank has more than doubled its share in gold reserves: from 46% to 22%. In the spring of last year, the regulator transferred from the US currency to the euro and yuan a fifth of international reserves - almost one hundred billion dollars.
Such actions of the Central Bank could slightly reduce the liquidity of international reserves, but now the gold reserves are less at risk of depreciation, because US government bonds are getting cheaper. And the reduction in dollar assets was provided mainly by the sale of American securities.