Graham Stack in Berlin -
Russia has entered a currency crisis, with the ruble exchange rate on December 1 hitting RUB52 to the dollar, taking the fall in the Russian currency's value in November alone to 19%, and 34% since the start of the year. The devaluation thus exceeds the ruble's fall during the financial crisis of 2009, making it the largest devaluation of the currency since the Russian default of 1998.
Like the 1998 default, today's collapse is triggered by the price of oil, with a barrel of Brent at $68 and WTI at $64, nearly 50% down from June's level of $115. "You can't do anything against the fundementals," Citigroup's Ivan Chakarov was quoted by newswires as saying.
The price of oil - and the ruble - have plummeted sharply since oil producer cartel Opec said on November 27 that its members would not cut production to support prices.
The price of oil is now widely expected to fall to the level of $60 per barrel, the breakeven price for shale oil produced in the US, which Opec is targeting, some analysts believe. First deputy head of Russia's central bank, Ksenia Yudaeva, confirmed on December 1 that the central bank was preparing for an oil price of $60 per barrel in 2015-2017, as quoted by newswires.
The ruble's fall appears to be accepted by Russian authorities as a defence against the oil collapse, according to analysts. Russia's central bank switched to a free float of the currency to conserve international reserves in November.
"Maybe the CBR misread the script on 'free float' as 'free fall'," Standard Bank's Tim Ash commented ironically, adding, "I don't think anyone expected the CBR to be quite so laissez-faire as this on the currency front."
Analysts are now busy forecasting what the weak ruble and oil price could mean for the Russian economy. According to a study by investment bank Renaissance Capital, at an oil price of $50 Russia's GDP would contract by whopping 5.8%, coming close to the 7% contraction of 2009.
But this should not translate into a full-blown economic crisis, according to Renaissance Capital's Charles Robertson. "The weaker ruble would be likely to stabilise the current account… and alleviate the effects of a drop in oil prices on the budget, with a deficit below 4% of GDP in the worst case," Robertson wrote in the report. At $50 per barrel, inflation would be contained due to the sharp GDP contraction creating an output gap, he believes.
Economy Minister Aleksei Ulyukaev, in comments to newswires on November 30, said that a $70 oil price should not impact significantly on the budget, thanks to the devaluation of the ruble: most budget revenues are dollar-denominated from commodity exports, and given the ruble devaluation, would translate into higher ruble budget revenues.
Russia has very low foreign debt at around 13% of GDP, so can cope with a steep devaluation. The banking sector is a different story, say analysts, with deterioration in loan books inevitable and some banks likely to go under. "If there are systemic problems emerging in the banks, they think they would rather use their $420bn in FX reserves to clear up the mess afterwards [than support the currency]," believes Ash.
Some see the devaluation cloud as having a silver lining, by boosting mid-term economic growth thanks to import substitution. "Logically one only has to conclude that the weaker ruble is part of the Russian authorities' policy responses to lower oil prices and sanctions as it helps prop up growth and helps keep the budget on track by boosting the rouble value of dollar oil revenues," Ash writes.
The weakening ruble seems until now to be actually propping up Russian industry. According to the HSBC and Markit Economics purchasing managers’ index, new orders were up in November, marking a fifth consecutive month of expansion. "Russian manufacturing is clearly liking the weak ruble and sanctions," Ash concludes.
The response of the population to the unfolding currency crisis could decide whether it will stabilise or develop into a full-blown meltdown. According to opinion polls, 45% of Russians are now actively following the ruble exchange rate, up from 32% in July. 50% believe that devaluation has impacted on their lifestyles and 67% believe that a continuing devaluation will impact on their lives.
The next stage in the currency crisis, analysts fear, may be for a run on the banks, exacerbating the ruble plunge, should Russians decide to withdraw their savings and convert them into dollar cash.
The impact on political stability in Russia is another unknown. Russia's annexation of Ukraine's Crimean peninsula in March boosted the popularity ratings of President Vladimir Putin to a historical high of 88%. But with the effects of the ruble collapse already making themselves felt among the population, Putin's personal rating has already started to fall to 82%, according to the Levada-Center pollster, as reported by the Moscow Times.
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