The ruble: A different sort of crisis
When a couple of weeks ago Russian president Vladimir Putin said in Beijing that the Ruble's "speculator fluctuations" would cease soon, that didn't seem to be just an empty promise, but rather the beginning of a well prepared plan. Just like the Crimean takeover. But on the very next day, the Russian Central Bank announced they were stopping artificially supporting the national currency, and shifting to de facto free-floating rates.
The decision had an almost immediate effect. The unprecedented 30% slump since the start of the year was slowed down and, after reaching a bottom at 48.7 RUB/USD, the Russian currency stabilised at 45.6.
There are not just market speculations behind this devaluation, as the Russian finance experts are claiming. And this makes this crisis a bit different from the ones that Russia experienced in 1998 and 2008. Right now, the loss of trust in the Russian currency is not only due to economic and financial reasons, but also geopolitical. Behind the devaluation there's the plunging oil prices worldwide, and also the tensions around Ukraine and the sanctions which have cut access for some of Russia's largest companies to the big European capital markets. As the FT notes, it's hardly a coincidence that the massive Ruble sell-off reached a peak simultaneously with the fears that the truce with Ukraine was only on paper, and the Russia-supported separatists were preparing a new offensive.
Some of these factors are not exactly temporary. The RCB's actions show that the central bank also considers these developments long-term, and believes the Russian economy should learn to adapt to these new realities. The economists are well aware that the sanctions will be there to stay for quite a while. And even if they're somehow lifted soon, that still wouldn't positively affect the moods at the market.
The RCB has spent the "modest" amount of $30 bn in October alone, in an attempt to contain the plunging Ruble, but that still couldn't stop its abrupt fall. For the entire January-September period, RCB's foreign currency reserves have shrunken by 15.9%, from $509.6 bn to 428.6 bn.
The reason for these massive expenses is the existence of the so called dual-currency basket, a financial mechanism for supporting the Ruble against the dollar and the euro, within prelimiarily defined limits. As of November 10 those limits were a movement of 2.5 Rubles in either direction. Thus, if the Ruble fell, the central bank would start buying Rubles, and viceversa. This way, all players at the market would know in advance when and how the financial institution would intervene with its billions. Problem is, the more the Russian currency was getting devalued, the more the panic increased. And it's hard to convince people that if 1 dollar is worth more than 43 Rubles, that's mere speculation.
So the RCB abandoned the basket and limited the size and scope of its forex interventions to $350 million a day, which is a drop in the sea compared to the almost 10 billion dollars that pass through the Moscow stock exchange every day. However, the bank retained its right of "significant interventions" if the market situation threatens Russia's very financial foundations. But what the size of such intervention would be precisely, and what exactly constitutes a "threat", remains rather ambiguous.
All of that was interpreted as a signal that playing against the Ruble wasn't safe, and in case of a massive intervention, the banks would lose a lot. Which is why the Ruble got temporarily stabilised at 45-46 RUB/USD. Well, at least for a while.
Despite containing the Ruble, it had already lost nearly 30% of its value compared to the beginning of the year. So, importing goods into Russia became very expensive, and the first effects of that are already visible everywhere. The domestic appliances chain M-Video which has shops all across the country, has announced that from next year its products will be about 20% more expensive. A similar announcement came from the cellphone dealer Evroset.
The devalued currency means more inflation as well. The Minister of the Economic Development, Alexey Ulyukaev believes that inflation for 2014 will be 4% higher than the previously expected 7.5%. It has already exceeded 8.5% as of mid November.
Of course, cheap national currency is not entirely bad news for Russia. It does tend to mitigate the effect of low oil prices on the national budget. It could also stimulate local production. But, given the concerns about extreme inflation, these upsides look too insignificant.
So, Russia should expect two effects: first, domestic consumption will sharply slump, because there'll be a shortage of capitals. Furthermore, people will be shifting to cheaper goods. For some segments of the Russian society, certain groups of goods and services will become a luxury - like imported cars, traveling abroad, holiday real estate. And all of this will happen within the next few months. All in all, things will be looking pretty bad at the start of next year.
Even the project of boosting the performance of the Russian football team at the upcoming 2018 FIFA World Cup (to be hosted by Russia) will be in trouble. National coach Fabio Capello has already complained that he hasn't received his salary for four months (which, the Daily Mail claims, amounts to the incredible J6.7 million a year, compared to the average J0.97 million for all remaining national coaches). The Russian football union has said it outright that there just isn't enough money, and in these circumstances there'll hardly be any for the time being.
And, while football remains mostly a matter of PR for Russia, other, far more significant projects are also under threat. The plan for expanding the Moscow Metro, which is the world's largest subjway system, could be halted soon, because the Chinese investors want to be paid in foreign currency, while Moscow insists to pay in Rubles. The contract for that project was signed in May, when a dollar was worth 34.78 RUB, while it's hovering well over 46 these days. As per the project, the Chinese should expand the Metro in exchange for the building rights in the adjacent areas. But now the benefit of these potential real estate properties looks more than doubtful, because their price is plunging along with the devaluing Ruble and the diminishing purchasing capabilities of the populace.
The devaluing Ruble has forced the central bank to make some serious changes in its updated forecast for Russia's macroeconomic development until 2017. The new version of the document says that investments will continue to slow down, the exodus of capitals will not be stopping, and domestic consumption will be dropping because of the diminishing real income (it dropped by 1% in September due to inflation). After two years of stagnation, towards 2017 the economy should have adapted to the sanctions, through gaining access to the Asian capital markets, taking more domestic loans, shifting from imported goods to national production, and developing a more competitive export due to the cheap currency. The planned economic growth for 2017 should reach 1.7%.
However, if the oil prices worldwide (which is a major part of the Russian budget) drop under $60 per barrel, Russia would already be facing a recession. And this nightmare scenario definitely shouldn't be ruled out, given the fact that there are no prospects of OPEC slowing down its oil output any time soon. In the meantime, the forecasts show that the US will keep increasing its production of shale gas and oil.
Even more worrying is Russia's behaviour in East Ukraine. New columns of Russian military equipment are entering the country, NATO reports. Whatever the circumstances around those incidents, they're not helping ease the growing tensions and distrust between Russia and the West (as became evident by Putin's behaviour at the G20 summit). And the sanctions are not likely to go away any time soon, either. Which means even more clouds gathering over Russia.
If Putin continues acting in the same manner, we should expect to see even further slumping of the Ruble. The general logic of the Russian economy (which is highly dependent on energy exports) suggests a more peaceful, less adventurous foreign policy - but that's not what we're witnessing right now. All of this means that no matter what economic and fiscal measures are taken to contain the collapsing Ruble, they would never be efficient enough without corresponding political effort in the same direction.
I have no doubts that the currency crisis is a central issue of discussion at the Kremlin right now. Because it's the healthy economy that has allowed president Putin to rule without serious internal turmoil for the last decade and a half. And the mantra that the economic problems are solely the West's doing, will inevitably stop being bought by his constituents at some point - and more importantly, by the powers-that-be in Russian politics. And then he'll be in big trouble.