The Ruble Crisis, Russia, And China: If You Take The King's Shilling, You Do The King's Bidding

Russia’s currency crisis, for the moment at least, appears to be quieting down. Equities have been rallying for the past week, and the ruble has recouped some of its most dramatic losses against both the Dollar and Euro. It’s hard to tell whether this is a dead cat bounce or a seriously ill cat bounce, but it at least appears possible that Russia could emerge from the recent volatility in its currency without turning into a Mad-Max style wasteland. Things haven’t fallen apart, at least yet.

But what if things once again take a turn for the worse and Russia needs some kind of external assistance? What would happen then? Well, one of the few things that almost everyone agrees on is that, should Russia require it, no bailout will be forthcoming from the International Monetary Fund. This isn’t because Russia’s finances are particularly bad, recall that the IMFIMF has thrown quite a lot of money into a far more parlous economic situation in Ukraine, but because Russia has blatantly flouted a number of Western foreign policy demands. The IMF is, at the end of the day, still a Western-led institution, and it isn’t going to do any favors for a Kremlin that has gone on an anti-Western binge. Depending on one’s personal views that might be fair or unfair, but it’s just about the least surprising thing in the world.

So if the IMF is out of the running who would step up to the plate? Well, the Russians have convinced themselves that the IMF’s disdain is irrelevant because their friends the Chinese would ride to the rescue. And, lo and behold, China is actually starting to play a much more active role in aiding countries in financial distress. As reported by BloombergBloomberg, China has not only signaled its willingness to expand a $24 billion currency swap program it had earlier concluded with Russia, it has also given several billion dollars of aid to Venezuela and Argentina two countries that, for various reasons, have been locked out of the capital markets.

I’m amazed that a bunch of self-described realists like the Russian government would take Chinese proclamations about partnership at face value. The Chinese government, of course, is completely and totally unsentimental in its approach to foreign trade negotiations, particularly when it comes to natural resources. China cares little about any notions of anti-Western brotherhood. It cares a lot more about securing access to oil, gas, and agricultural products at the lowest possible price.

The real question, then, isn’t “will China give Russia money” it is “what are the conditions that the Chinese government will attach to a potential bailout?” Based on the way they negotiated over natural gas, one should expect an extremely tough approach. The Chinese understand that the supply of international lenders is a limited one, and that with the IMF out of the running the Russians are essentially out of other options. Any deal between the two sides would reflect this simple reality.

Do the costs of cutting a deal with the Chinese outweigh the benefits? It’s not clear, and it’s ultimately up to the Russians to decide. But there’s no way to get something for nothing, particularly when your entire economy is suffering from a systematic crisis of confidence. You often hear about the “onerous” conditions that the IMF attaches to its aid packages, and it is true that IMF bailouts come with all sorts of strings attached to them. But the Chinese aren’t in the business of running a charity. Beijing would also expect to get substantial concessions in return for any financial aid it extends to Moscow. The nature of these concessions would, of course, be very different from the IMF’s (there would be a lot less emphasis on “democratic good governance” and a lot more emphasis on “money”) but I’d be shocked if they were any more forgiving or generous.

Despite what you often read in the media Russia isn’t “isolated.” A quick glimpse of Putin’s recent travel schedule (he’s taken official trips to India, Turkey, and China) is all that it takes to demonstrate that Russia still conducts serious business with many of the world’s largest and most populous countries. But Russia’s options aren’t limitless: it can choose not to do business with the West, but it has to do business with someone. Should the Russians accept a bailout from China, they’ll very quickly learn that Westerners aren’t the only ones with demands.

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http://www.forbes.com/sites/markadomanis/2014/12/23/russia-and-china-if-you-take-the-kings-shilling-you-do-the-kings-bidding/