Russia Begins Hoarding Cash as Oil Uncertainty Continues

Russia now has about $550 billion of cash reserves stashed away for a rainy day. The COVID-19 virus continues to wreak havoc on major countries of the world, and Russia feels the need to play safe amidst the growing pandemic.

They have put together what might be one of the biggest cash reserves in the world, and surprisingly, this only accounts for only 2% of the country’s gross domestic product.

Tracking back to the 2008 global financial crisis that rocked even the most prepared countries of the world, Russia spent 10% of its gross domestic product to combat the collapse. The country successfully pulled itself out of ruins within a few years of the wreck.

However, the COVID-19 virus is none like ever before. Oil prices have dropped to a level that no one might have previously envisaged. And now, Russia, alongside Saudi Arabia, is looking to cut costs.

Brent Oil Price 2020 - Source: Bloomberg L.P.

Overall, Russia needs to spend its cash reserve carefully because, in truth, that is all there is for them.

The result of this hoard has been insufficient relief and stimulus for the majority of the Russian population. Business owners have expressed their displeasure on President Vladimir Putin’s approach to combating the pandemic. Most of the business owners lay at the mercies of bankruptcies.

Without a doubt, if the businesses go bankrupt, massive unemployment would result. Even if a portion of the Russian population work from home, Russia’s GDP could still drop by as much as 1.5% or 2% this year.

Russia's GDP as of 2017 - Could still drop 1.5% - 2% in 2020

The head of the Business Protection Association (BPA) in the capital, Moscow, commented that times are tough, and almost everyone is suffering.

Our analysts have concluded that if Russia continues like this, although cash reserves might be preserved, an impending economic crisis and a deep recession will surface in the long run.

Currently, Russia prepares for the worst-case scenario that might entail significant drops in oil prices. The country’s budget will be reviewed and planned with the new oil prices.

Russia’s Direct Investment Fund’s Chief Executive expressed in an interview that Russia is “very close” to agreeing on the oil production cuts. Kirill Dmitriev, Head of the Russian Sovereign Wealth Fund, also expressed a similar bias.

‘Low oil prices favour no one,’ Andrey Kostin, Chief Executive of VTB Bank, also remarked in a CNBC interview. It is reasonable to expect that Russia and Saudi Arabia will reach an agreement on oil production cuts despite the falling demands. The meeting to discuss this will be held on Thursday.

Regardless, the Russian government is willing to wait until May to ascertain where oil prices are headed and weigh their options on disbursing financial relief for the citizens. In any case, practical methods must be created to keep the country’s economy afloat and to distribute aid directly to the Russian population.

As of Monday night, International Brent Oil Futures traded at $34.11- a rise of 2.43%- while the United States Crude Oil WTI Futures spiked by about 4.1% to $27.15.



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