* Russian reserves are fifth largest in the world
* Reserves cover maturing foreign debt three times over
* But sharp drop could accelerate capital flight
* Sanctions likely to tighten amid confrontation
* Central bank might try to halt any rouble slide
By Marc Jones and Lidia Kelly
LONDON/MOSCOW, Aug 1 Mathematically Russia has
enough reserves to hold out for at least two years before
Western sanctions start to choke the economy, but it must avoid
reawakening the "sleeping dragon" of investor panic.
At first glance the stockpile - $472 billion of hard
currency reserves and nearly $1.5 trillion of assets overall -
is more than enough to keep banks, firms and the economy going
as the West tries to punish Moscow over the Ukrainian crisis.
But this ignores the psychological effect. Russia burned
through $200 billion in six months during its last major crisis
in 2008-09; if reserves were to start draining away again, panic
could quickly set in among people inside and outside the
country, accelerating a flight of capital.
The United States and European Union first imposed sanctions
after Russia annexed Crimea from Ukraine in March and have since
tightened them. This week the EU froze five state-controlled
banks out of its capital markets in measures targeted at
Russia's financial, military and energy industries.
While Russia is on the verge of recession, analysts and
investors generally agree with officials there that its finances
can withstand a tightening of the screws for now.
"They have reserves of almost half a trillion dollars. Given
the minimal refinancing needs of the sanctioned banks, they're
in a reasonably comfortable position," said Brett Diment, head
of emerging markets funds for Aberdeen Asset Management.
Those needs are in the range of $7-8 billion in the next
year and the central bank has said it will support any domestic
bank hit by the sanctions.
Analysts at Morgan Stanley calculate the reserves, which are
the fifth largest in the world, could cover all maturing
external debt three times over and imports for around 17 months.
That's much longer than the six months threshold, below which
alarm bells usually start ringing with emerging economies.
Reuters calculations based on central bank data show big
Russian banks must refinance around $50 billion of debt this
year and next, while companies' needs are closer to $100
This seems manageable, but many factors are not clear-cut.
About a third of the reserves are in two oil wealth funds
earmarked for countering drops in international oil prices
rather then funding banks or firms. Roughly $40 billion is in
gold, while $13 billion is parked at the IMF, official data
Russia also needs to keep income flowing from energy
exports. While the EU sanctions target European exports of
equipment to the Russian oil industry, those for gas production
are exempt. This underlines a basic interdependence: Europe
needs Russian gas, just as Russia needs the money it earns.
WAKING THE DRAGON
Nevertheless, most Russia experts believe the sanctions are
likely to get tougher in the next few months. Neither side
appears ready to back down in the crisis, which deepened after a
Malaysian airliner was brought down over territory in eastern
Ukraine controlled by pro-Moscow rebels last month.
At the very least, the number of banks and firms needing
help as they are hit by sanctions is likely to grow.
One of the biggest unknowns is how many foreign investors
and Russians will move their money out of the country if
relations with the West, and the economy, sour further.
Russia was badly hurt during the global financial crisis six
years ago, with capital fleeing abroad and the central bank
burning rapidly through its reserves as it tried to slow a
one-third drop in the rouble's value against the dollar.
Recent central bank data have shown Russians again ditching
the rouble for dollars and other foreign assets, at the fastest
pace in more than four years.
Around $75 billion poured out of Russia in the first six
months of this year and Morgan Stanley expects a similar amount
will leave in the second half. One economist said the question
was whether "the sleeping dragon of demand for dollars and other
foreign assets would be woken up again", adding that it probably
would be to a certain extent.
While the central bank managed the rouble's slide during the
last economic crisis, it might react differently if the current
geopolitical confrontation worsens.
Timothy Ash, head emerging markets strategist at Standard
Bank in London, said that the central bank may try to hold the
line if capital flight accelerates.
"Once that starts, reserves would melt pretty quickly, and I
think that unlike in 2008/2009 the central bank would be loath
to let the currency weaken amid geopolitical risks," he said.
The authorities could reimpose capital controls, but earlier
in the crisis the central bank made clear it opposed such
action, which would reduce Russians' demand for foreign currency
but also raise borrowing costs for corporations.
While it is difficult to judge what everyday Russians would
do, the exodus of investors may not turn into the stampede some
fear. Foreigners hold almost $200 billion of Russian equities,
according to the central bank. But with many emerging market
funds benchmarked to indexes such as MSCI's, where
Russian stocks account for around 5 percent, it means they
cannot pull all their money out.
Another plus point is that with $1.47 trillion in total
assets - reserves plus those held both at home and abroad by
Russians - versus $1.34 trillion of liabilities, Moscow's
finances are in the black.
The biggest difference between now and the 2008-09 crisis is
that this time the oil price, which brings in much of Russia's
wealth, is not suffering from a global financial crisis.
However, Moody's rating agency warned on Thursday that the
current turbulence could leave Russia exposed if oil prices were
to fall sharply after all. "If capital outflows continued at a
similar pace as in the first half of 2014 because of the Ukraine
conflict and sanctions, the level of reserves with which Russia
would face an oil shock would be significantly lower than in
2008," Moody's said in a report.
But for now, while the situation remains unpredictable, the
better global economic environment than in 2008-09 should mean
Russia's finances deteriorate at least at a slower pace.
"If the corporates and banks lose access (to capital
markets) you will have to keep an eye on the currency reserves
because they would have to rely on the Russian central bank to
provide the dollars to fund their external debt," said Viktor
Szabo, a Russian specialist that works alongside Diment at
Aberdeen Asset Management. "But it is not a short-term issue, it
is more of a 2-3 year horizon."
(Writing by Marc Jones; editing by David Stamp)