What really happened to Russia's reserves and who is to blame

Victoria Pavlova

After Western countries froze Russia's international reserves by about $300 billion out of the available $643.2 billion, a wave of criticism hit the head of the Central Bank, Elvira Nabiullina, because it is the Central Bank that is engaged in "effective management" of reserves. Also, President Joe Biden promised to send a proposal to Congress that would allow the seizure of the assets of Russian entrepreneurs and direct them to the "needs of Ukraine." As if it didn’t come to the direction of Russia’s international reserves for Ukrainian needs. Sanctions also began with restrictions on state-owned companies and entrepreneurs close to the authorities, and then Western countries got to state assets as well. State Department head Anthony Blinken has already voiced a similar initiative.

State Duma Speaker Vyacheslav Volodin defends Nabiullina, stating that the reserves have not disappeared, and "The West will return them to us with interest". Novye Izvestia, together with experts, tried to figure out what are the chances of returning the reserves and whether it was possible to avoid their freezing.

Wasted legal fees

Elvira Nabiullina announced that Russia is preparing to challenge the "unprecedented freeze" of international reserves in court. But this situation is unprecedented only for Russia. Iran, Venezuela, Libya, North Korea and Syria have similar experiences. Of all these countries, only Libya has attempted to unfreeze assets in the United States with the help of a court. They ended up with nothing. Previously, they tried to sue the EU, for example, Sberbank and VTB. As a result, only time and money wasted. The lawsuits were filed in 2014 after the first wave of sanctions, and the refusal of the European Court was received only in 2018.

So the experts do not share the enthusiasm of Vyacheslav Volodin. State Duma deputy, member of the Communist Party faction Alexey Kurinny argues that unlocking requires much more than just filing a lawsuit.

- I do not remember such precedents. Usually access to international reserves was restored in the event of a change of governments, in a number of African and Central American states there was such a story. There are no other global stories, this is the first time such a volume of reserves has been frozen.

Economist Nikita Krichevsky points out that such decisions are made in the West for a reason - they are adjusted to a regulatory framework that allows them to be considered legal.

- All these blockings and freezes are confirmed by some legislative acts. For example, for more than 40 years, Iran, despite all efforts, has not been able to unfreeze the $400 million that was frozen in 1979. At the time, that was a lot of money. Kazakhstan had certain problems with the freezing of reserves, but they were quickly resolved, and not through the courts, but through contacts at the interstate level. As far as Russia is concerned, all this is backed up by regulations, documents, and legislative acts that existed in one way or another before. Therefore, there is no chance of unlocking by court order. The preparation of lawsuits by the Central Bank is done in order to show the appearance of work, to create a good impression on Putin in order to just try. But there is no chance, especially in a situation where Russia is a global pariah and is blamed for the deaths of hundreds of civilians in Ukraine.

Foreseeable force majeure

The Central Bank refers to the freezing of assets as a force majeure. But relations between Russia and the West did not escalate overnight - only Joe Biden "wang" the beginning of the special operation for a month. And before that, countries exchanged accusations of hostile intentions against each other. The freezing of assets could not have been a surprise. Didn't anyone tell Nabiullina about the impending special operation?

How else can one explain the fact that, following the results of last year, the euro turned out to be the main currency for government savings?

The share of dollars over the past couple of years has fallen sharply - in March 2018, dollars accounted for 43.7% of all Russia's reserves. But they were mostly replaced by the euro and partly by the yuan. The portfolio was assembled correctly or incorrectly - the opinions of experts differ. Doctor of Economic Sciences Igor Nikolayev admits that the Central Bank greatly underestimated the risks of such a structure, but partly justifies the actions of Nabiullina.

Nobody thought it was a risk. In fact, it was clear that they were insuring themselves and heavily exiting the dollar in case of possible sanctions and risks, but where were the guarantees that the EU countries would not act as a united front with the United States, which is happening now? It must be admitted that they simply underestimated the situation - this is so, in mild formulations. So they would go to the same yuan. The fact that the risks were underestimated is confirmed by the rapid increase in reserves in dollars. More than 640 billion dollars - this was the maximum amount of reserves in recent times. But in general, it was difficult to assess the risks, so I believe that the Central Bank acted effectively.

Not everything is gold...

Deputy Aleksey Kurinny believes that gold could be salvation. Now the Central Bank has set a course to increase the share of gold in reserves. To this end, in early April, he even changed the procedure for settling accounts with gold producers: before, the regulator bought the precious metal at a fixed price of 5,000 rubles per 1 gram, and now the price will be negotiated. This will make it easier to replenish reserves, because in the market at the end of March, one gram cost about 6 thousand rubles, and producers had no desire to sell gold to the state.

- In my opinion, in general, there was a big risk to keep our reserve funds in securities - both American and European. There are other options, and the currency of friendly countries, if we are talking about the yuan, and gold in its pure form, which in other countries makes up 50% - 60% of reserves, while in our country only 24% turned out to be in gold. We consider the policy pursued by the Central Bank and the economic bloc to be wrong.

But there are questions about gold as well. Reserves are needed not just to admire them, but to pay for debt obligations and imported goods in a critical situation. And now she has arrived. Only the times when it was possible to pay with gold chervonets (now it would cost about 46.5 thousand rubles) are long gone - the USSR finally abandoned the gold standard in 1937. Similar processes took place in the world. Igor Nikolayev explains that now it is simply impossible to buy anything in the world for gold.

- Gold has the disadvantage that its liquidity leaves much to be desired compared to the major reserve currencies. And in fact, the Central Bank understood this very well. After all, you won’t be able to pay with this monetary gold either, you still have to exchange this gold for some kind of currency. That is, it turns out that it is possible to accumulate something and you will not lose this gold, but as soon as you want to use it, you will not pay with kilograms of gold for importing medicines, for example.

Nikita Krichevsky warns that gold trading is costly.

- Gold is not an option. Exchanged not through gold, but through money. And the rate at which someone will accept gold bars is significantly lower than the rate that is currently on the exchange, plus this is associated with a large time lag - first you need to get the gold, then bring it, then conclude an agreement, conduct an examination, and so on.

Meanwhile, Dmitry Peskov said that a “two-circuit monetary and financial system” is being discussed, in which the ruble will be backed by gold and a group of goods that are currency values. Valery Mironov, Chief Economist of the Economic Research Foundation of the Development Center of the National Research University Higher School of Economics, explains why this may be necessary.

- You can think about how to provide the ruble with gold, it is quite possible. You can think about returning to the "golden chervonets" system, which was during the NEP period, and was even accepted for settlements in Europe. We just want to move to a system where the currency is pegged to gold the way it was before. The ruble will continue to be affected by our economy's oil-price behavior, but gold-backed sustainability will be greater than just a free-floating ruble.

Ambiguous yuan

To the yuan, which now loves the Central Bank, the attitude of experts is also ambiguous. Alexey Kurinny believes that at present the risks of investing in the Chinese currency are minimal, and it is quite suitable for the role of a reserve. But Nikita Krichevsky believes that the risk of investing in yuan is just as unjustified as the risk of investing in dollars and euros.

- The yuan depreciated recently. This could be predicted, because the yuan exchange rate is a serious tool for maintaining the competitiveness of the Chinese economy. What happened the other day with the yuan, and the fact that our remaining reserves also depreciated - this was to be expected, because the yuan has been strengthening over the past months and years, and everyone said - look, what a visionary Nabiullina ... As a result - a failure.

But according to Igor Nikolaev , the yuan is now the best of the worst: on the one hand, there are problems with non-market formation of the exchange rate, on the other hand, it is now better than dollars, euros or gold.

What prevented you from investing

Currencies in bank accounts, investments in liquid government debt securities, gold - all these are classic and most conservative savings instruments. Might be worth trying something new? The Norwegian Pension Fund is not afraid to invest, for example, in shares of promising environmental and technology companies. Its assets have already exceeded $1.3 trillion, and last year's yield reached 14.5%. The return on the stock market portfolio has exceeded 20%.

Yes, after the fall in international markets in March-April 2022, the fund lost $73.5 billion. Huge money, but the fund earned much more last year - 176.8 billion dollars! This is what happens if you strive not to minimize losses, but to increase profits. It is the Norwegian fund that Nikita Krichevsky cites as an example. It was also possible to follow the example of China or Japan.

- Nothing prevented us from hiring competent specialists who could place this money in stocks and bonds all over the world with high quality. What, in fact, did they do in Norway. This was not done in 2008 or in the next 15 years. It was possible to invest in Tesla , in Amazon , in the shares of such and such other technology companies, such as Apple . They cost a fortune back then. But we decided not to. And the second option involved the placement of funds in intellectual property - the acquisition of patents, certificates, licenses, technologies, and quite specific ones. Exactly along this path were the Chinese in their time. And before that, the Japanese. If then we would have started doing something similar, we could have done something, even taking into account corruption and a twofold increase in the price of a patent, and now there would be no problems with import substitution.

Human capital is a longstanding problem in Russia. Vladimir Putin in 2016 argued that human capital is the main wealth of Russia, in 2018 he reminded that a breakthrough is impossible without human capital, in 2020 he discussed funding for areas related to the development of human capital with the head of the Accounts Chamber Alexey Kudrin. But all these appeals did not affect the management of the reserves.

True, Igor Nikolayev objects - it is still worth growing to the degree of freedom in decision-making that Norway has.

- Reserves must first of all ensure safety. And the pursuit of making more money by investing in stocks, for example, is a risky investment. We have a lot to lose. The most important thing is to ensure the safety of these reserves. The economy must earn. Norway can afford this - a hundred billion more, a hundred less, there will not be much loss. We have not yet reached this stage, of course.

Isolation VS globalism: what are we betting on?

There are risks on all sides of financial instruments. Therefore, Alexey Kurinny sees a way to invest not in the foreign economy, but in the domestic one.

- We believe that there was no point in accumulating such huge reserves for the Russian Federation. 300 billion dollars would be quite enough for the sustainable position of the country. The rest had to be invested in their own economy, and not in some securities of foreign companies. We need to develop our own industry, our own technologies, and be self-sufficient. Unfortunately, not so many steps have been taken towards this, despite the talks about import substitution that have been going on for 8 years.

But again, the structure of international reserves depends on the chosen policy vector. If we lower the iron curtain and switch to a “subsistence economy”, then all this currency is really not needed in any form. If Russia is part of the global world, then foreign exchange reserves are indispensable. Imported technologies, services and goods must be paid for. As of the end of 2021, according to the Central Bank, international reserves were sufficient to finance imports for 20 months. The freeze automatically reduced that airbag to 10 months.

As a result, there was a fatal discrepancy between the financial and foreign policy of the state. The Central Bank acted as usual, despite the country's preparations for a special operation. By itself, the Bank of Russia could not act. The range of possible investment instruments is strictly limited by laws. But neither Elvira Nabiullina, nor the government, nor the deputies initiated a revision of the rules. Collective responsibility, as always, led to collective irresponsibility. Individually no one is to blame, but half of the reserves are now unavailable.