Russia Is Flush With Petrodollars

From begging the IMF for aid, to having a larger reserve than the IMF? What a turnaround. Brad Setser notes:

In 1998, Russia was very short on cash. It went to the IMF and got a $15 billion credit line. When it didn’t hold up its end of the bargain – taking steps to collect a bit of revenue – then Treasury Secretary Rubin pulled the plug on the program after only $5 billion had been disbursed. He argued that there was no point in throwing more good money after bad.

$5b. Chump change. That is less than ½ of what Russia added to its reserves in the first three weeks of April. Russia’s reserves were $217.1b on April 21, up from $205.9b at the end of March. For the full month, Russia’s reserves will probably grow by $15 billion.

By the end of the year, Russia will likely have as many reserves – around $300b – as the IMF has on deposit. Talk about a reversal of fortune.

... Which brings me to the real point of this post –

All the money that we pay to our oil producing friends has to go somewhere. And a big fraction never actually flows into the domestic economy of the oil states. The governments of oil states often get their cut of the country’s oil revenues in dollars, and just hold their take abroad. They don’t ever convert the dollars (or euros) into the local currency.

Parking the oil windfall in government accounts abroad may not increase Russia's standard of living much, but it certainly makes life a lot easier for the central bank. If export proceeds are not converted into domestic currency, the central bank doesn’t need to take offsetting steps to withdraw the currency from circulation. So called sterilization – the sale of central bank bills to withdraw domestic currency created when export revenues are converted into the local currency – isn’t necessary.

If the Oil States do not invest enough to improve their infrastructure, healthcare and education, what will happen when the price of Oil normalizes, or, if renewables become more viable?