The ruble continues to track the price of oil, falling to new historical lows on October 15 at 41 rubles to the dollar and 51.87 against the euro, as the price of oil plunged to its lowest mark since 2010. The price of a barrel of Brent crude dropped 3% on October 14 to $86, putting it now $20, or nearly 25%, lower than in June 2014.
The ruble's drop has forced the central bank to spend more than $6bn over the past week, as each successive widening of the currency trading corridor by 5 kopeks comes only after the central bank spends $350m to support the ruble. Russia's central bank has already spent $54.9bn out of its foreign currency reserves since the start of 2014, bringing its reserves to a four-year low $454.7bn, but only around $220bn of that is in hard currency cash.
"Analysts are debating whether the central bank should intervene more than its current policy allows or perhaps stop intervening, amid claims that it is wasting its foreign currency reserves," Sberbank CIB analysts wrote, as quoted by the Moscow Times. "If intervention continues at the current pace until year-end, Russia's foreign exchange reserves could fall by around another $40bn," they added.
Three months of import coverage for Russia - considered the safe level of central bank reserves to defend against a currency crisis - comes to $75bn, according to International Monetary Fund figures - meaning that Russia can currently finance nine months import coverage from cash reserves, and if converting bullion reserves to hard currency, one and a half years, “which is still likely ample for the central bank to manage the rouble as it sees fit, barring a major crisis of confidence,” according to Standard Bank's Tim Ash.
In 2015, the central bank is set to move to a free floating ruble, which - if it goes ahead – will end the bleeding of reserves, but at the risk of the fall of the ruble panicking the population.
Russia's top economic thinkers are against defending the currency. "Holding the ruble at one level or another carries with it serious risks for the economy," said German Gref, head of Russia's largest bank, state-owned Sberbank, as quoted by RIA Novosti.
While bad for investors, how the fall in the ruble plays out for the manufacturing sector is a moot point. According to HSBC economist Alexander Morozov, "the overall situation in manufacturing looks rather stable”. Some import substitution effect is expected to support domestic producers, although car manufacturers have experienced a fall in demand of around 20% since the start of the year as consumers postpone big ticket purchases because of uncertainty. Budget retailers who stock more Russian produce have on the other hand had a 20% spike in sales.
An expected interest rate rise from the central bank in October will, however, further contribute to economic slowdown, warn experts. Russian inflation is expected to rise on the back of devaluation, prompting the central bank to hike rates.
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