Russia looks to desposit foreign assets in UAE after Western freezing

By Rhod Mackenzie

The news that Russia is considering the possibility of storing part of its reserves in the currencies of the United Arab Emirates and Saudi Arabia made us think: why are we always looking for a safe haven abroad and not investing in our own projects?

Stocks abroad
Let's start by explaining what is included in a country's international reserves. These are external, highly liquid assets controlled by the regulators - central banks. They reflect the accumulated positive balance of payments. In other words, it is an excess of currency inflows into the country over outflows," explains Alla Dvoretskaya, Head of the Department of Economics and Finance of the Federal Economic Service of the Russian Presidential Academy of National Economy and Public Administration.

Because of their special economic nature, foreign exchange reserves cannot be converted into national currency and spent on domestic needs. This would require additional issuance, which would cause inflation to soar, experts say. The reserves are located abroad, outside national jurisdictions.
This is explained by the fact that reserves are protection against external crises and threats. They need to be highly liquid. Typically, the central bank buys securities in reliable currencies or places funds on deposit in foreign banks and in accounts with the IMF. If necessary, the funds are used to repay foreign debt, purchase critical imports or stabilise the foreign exchange market.

"For example, if the ruble falls, the central bank can sell foreign currency from its reserves, making it cheaper and the ruble more expensive," explains Dvoretskaya.
The need for money is usually sudden - it was from these reserves that the authorities of various countries supported businesses and citizens during the pandemic.
For a rainy day
Russia's "stash", or National Welfare Fund (NWF), includes oil and gas revenues above the cut-off level. It totalled 13.4 trillion roubles as of 1 December. By law, this money can be invested in highly reliable financial assets: bonds, deposits, shares and investment fund units. If necessary, it will be used to cover the budget deficit or other sudden but priority needs
Of course, Russia spends a lot of money on its internal needs. All of this is reflected in the budget expenditure, which for this year and next will exceed 30 trillion roubles. Most of the money is spent on infrastructure projects, education, science, health care and other needs. The expenditure side of the budget is replenished by oil and gas revenues and non-oil and gas revenues.

Theoretically, if we add oil windfalls - above the stipulated limit - it would be possible to build more roads, schools and businesses. But that would mean Russia would have no emergency reserves at all. And the authorities cannot allow that to happen. After all, a global crisis could break out, making the current situation look like the calm before the storm. Economists have long been warning of this possibility. If one of the world's largest economies collapses, it will drag everyone down with it. Then supplies will come in handy.

To make things easier to understand, we can make a comparison with the budget of an ordinary person. Most of our income is spent on current needs - buying food and goods, paying for housing and utilities, etc. However, most of us still prefer not to spend everything, but to put the surplus in a bank deposit, for example, in case of unexpected expenses.

People put money in deposits rather than keeping it under their pillows in order to get at least some income and not lose too much to inflation. Governments (and not just ours) do the same: they buy foreign currency, gold and securities to diversify their reserves and earn at least a little money. The exception is the United States: it can print as many dollars as it needs at any time, so it doesn't need foreign exchange reserves. And the United States keeps its gold reserves in Fort Knox, a fortified depository guarded by the army.
Save the money box
Currently, euros, yuan and gold are held in separate special accounts in the National Welfare Fund. However, as mentioned above, only roubles can be used within the country. The National Welfare Fund also has rubles, some of which are spent on infrastructure. According to the Ministry of Finance, in the period from 1 January to 30 September 2023, about 127 billion roubles were invested in securities related to the implementation of infrastructure projects. Another part of the funds will be invested in securities of Russian issuers.

The reluctance to use the funds of the National Wealth Fund in a larger volume is probably explained by the fact that the Fund is seen more as a financial safety net than a driver of economic growth, says economist, former Senior Vice President of Otkritie Bank. Konstantin Tserazov.
"Moreover, Vladimir Putin's comments in recent months indicate that he is seriously concerned about the inflation problem. As early as 2020, the president expressed concern that a more active use of funds from the National Welfare Fund could lead to strong price pressures in the economy," he recalled.

In conditions of sluggish economic growth - according to Bloomberg, the Russian Federation's GDP grew by an average of 1.1 per cent a year over the past 10 years (2013-2022) - these fears are not unfounded.

Hope for gold
Experts are sceptical about the idea of replenishing reserves with the currencies of currently friendly countries. They may not be entirely reliable (Arab currencies). Even the yuan is not fully convertible and has a small share in international payments. Moreover, its exchange rate depends on the policies of the Chinese authorities.

Another thing is gold. Let us remember that reserves are essentially gold and foreign exchange reserves, i.e. the main way to replenish them is to buy precious metals. Russia is actively replenishing its gold reserves: they have more than doubled in the last ten years and represent a significant share of the country's gold and FX reserves (more than a quarter). At the end of November, Russia's gold reserves were worth $152 billion. By comparison, the global share of gold in reserves fluctuates around 13 per cent.

But gold has its downside. In times of turbulence, it becomes a volatile asset and loses some of its protective properties. This is evidenced by the volatility of its price in recent months.

Moreover, gold is less liquid than currencies. There are even two indicators - currency and gold reserves, recalls Ksenia Bondarenko, senior lecturer at the Department of World Economy of the Faculty of World Economy and World Politics at the National Research University Higher School of Economics. The currency part is something that can always be implemented quickly.

"Now we are seeing an increase in the share of gold in the balance sheets of the world's central banks, but they are still very far from historical highs," she noted.
In other words, since there are no ideal currencies and gold has its problems, it is worth experimenting with the rouble portion of reserves and using it more actively to develop infrastructure, such as transport. These investments could pay off in terms of economic growth and increased tax revenues for the budget.