Brad Setser Profile picture
Sep 20 7 tweets 3 min read
Bloomberg's tanker tracking is quite impressive.

It seems like Russian seaborne crude shipments fell off in the first part of September without any impact on global pricing.

Russia exports product as well crude -- and has pipeline exports as well as seaborne exports. But a sustained falloff in exports to the EU without offsets in volume to Asia or tightness in the global market would be a good result.

At the same time, it would be a mistake to underestimate Russia's short-term financial resilience.

@elinaribakova has rightly drawn attention to Russia's low level of fiscal debt. Debt is only 20% of GDP, and Russia can fund deficits domestically.


As Elina notes, a weaker ruble also acts as a natural fiscal buffer in the face of falling revenue from oil sales, keeping domestic revenues up. Russia has managed through some quite large fiscal squeezes in the past (revenues are in dollars in the chart)

And there is an additional factor that should get more attention -- higher non-oil exports and limited imports have pushed Russia's current account break even oil price down to quite low levels.

Under $20 a barrel going into 2022

The current account break even is the oil price that balances Russia's external accounts.

It assumes constant export volumes -- or ~ 8 mbd of oil. But it is still a useful benchmark: there are lots pf price/ volume combinations that match 8 mbd at $20 a barrel.

So I agree with @elinaribakova --

A fall off in Russia's oil export proceeds will squeeze Russia over time, but it is unrealistic to think Russia faces an immediate financial constraint (unfortunately).


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More from @Brad_Setser

Sep 22
The 2022 depreciation of Asian currencies has been led by countries that have strong external balance sheets -- large foreign exchange reserves and, in the case of Japan and Korea, large stocks of foreign assets in their national pension plans.

1/ Image
The yen's depreciation obviously reflects the large divergence between monetary policy in Japan and the United States --

The yen also has reached a long-term low in real effective terms. Last night's intervention wasn't a total surprise ...… Image
The odds that MoF's intervention "works" even in the face of an ever increasing interest rate differential would increase if Japan looked a bit more holistically at the management of the government's foreign assets ...

Read 7 tweets
Sep 21
The dollar's current (extreme) strength is testing the foreign exchange policies of the set of Asian economies that historically have intervened to limit their currencies strength. Now they are all seeking to limit weakness - a big shift.

Korea is overtly defending 1400 ...

1/ Image
Korea has plenty of reserves; it can use those reserves to bridge to a world with lower LNG prices and higher spending in the oil exporting economies (Korea's trade will swing back to surplus with time). It doesn't need to allow current won weakness to drive inflation ...

Plus, Korea is starting to adjust policies that supported its prior fight against won strength. Its huge National Pension Service is discussing "improving its forex management rules" on Friday. The NPS outflow is 2% of GDP a year. It matters.

Read 10 tweets
Sep 20
Would be good to see more detail on the rescheduling of Ecuador's borrowing from CDB and China ExIm. Ecuador (per the IMF) was paying $1.4b a year on these two loans, so the $1b in cash flow savings between 2022 and 2025 may leave a lot of payments.…
The loans were amortizing fast ($1.4b in payments on a stock of $4.5b .... ) so deferring the maturity dates (til 2027 and 2032) makes sense. But on the surface this seems like a fairly thin restructuring -- with significant ongoing payments.

(chart from IMF article IV) Image
Ultimately, a restructuring (see @simonh_dk in FT alphaville) exchanges one cash flow profile for another.

Think these loans were already rescheduled once back in 2020 -- so hopefully this shift really gives Ecuador more time to repay.…
Read 4 tweets
Sep 19
No doubt that China's share of the Treasury market is way down.

China's holdings, adjusted for the hidden holdings in Belgium/ euroclear, have been flat since 2016, and the stock of Treasuries outstanding has surged.

Friday's TIC data showed small Treasury sales, but also modest Agency purchases (continuing a recent trend). The recent dip in China's Treasury holdings looks to be primarily a function of changes in the market value of China's bond portfolio.
Chinese reserve demand really was squeezing Treasury supply prior to the global crisis (China was almost forced into Agencies). And then after the global crisis, Chinese foreign asset accumulation shifted to the banks and belt and road lending, so the flow dropped off.

Read 4 tweets
Sep 19
The Bank of Korea pretty obviously stepped into the market last week to prevent the won from depreciating through 1400.

China though declined to intervene overtly, and let the yuan depreciate through 7…
Korea, Japan and China have all been signaling discomfort with the weakness in their currencies against the dollar. And it is interesting (at least to me) that Korea was the first to back its signaling with significant intervention.
So, at least for now, Korea appears to be trying to draw a line in the sand at 1400 (which is a very weak level for the won) while China isn't drawing a line at 7 (1400 for the won is weaker absolutely than 7 for the yuan, though China's competitiveness increases over time)
Read 6 tweets
Sep 16
Great @Trade__Talks discussion of profit shifting and global tax reform with Kim Clausing.

Someday the role of global tax chains in global trade will be as well understood as the role of global value chains.…
This is obviously an issue that I care deeply about ...

I would personally put even more emphasis on how shifts in the physical location of production can facilitate the shifting of paper profits to low tax jurisdictions.
The U.S. for example is a big net importer of pharmaceuticals from Ireland, Switzerland, Singapore and Belgium. And it is now well documented that U.S. pharmaceutical firms report that the bulk of their global profit is "earned" outside the U.S. Image
Read 6 tweets

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