The Fall of Ruble Caused a Near-Panic

The Fall of Ruble Caused a Near-Panic

Wherever the gaze is cast in Moscow, it is impossible to escape neon signs with exchange rates that are found at every corner of the street, and this Friday, November 7, they capture the attention even more than usual, when ruble reached a new historically low stage. By late morning, dollar and euro traded against ruble went up and 48 rubles to 60 rubles, causing a near-panic in the Moscow financial circles.

By late afternoon, the Central Bank of Russia issued a statement, admitting the “first fruits of risks to financial stability.” In one week, the Russian currency lost 10% of its value, more than a quarter since the beginning of the year.

“In these conditions,” the Russian Central Bank said it was “ready to increase its monetary interventions at any time and to use all the instruments at its disposal.” Nothing specific, but this statement marks a decline in the willingness to preserve its reserves. Forty-eight hours earlier, the institution had announced its intention to reduce its operations to 350 million rubles a day to defend the national currency – a drop compared to the $30 billion wasted on this goal in the month of October alone – at the same time it restricted access to credit by raising its key rate by 1.5 percentage points to 9%.

“The position of RCB is consistent, but its decision to float ruble comes as the external pressure is high,” says Natalia Orlova, analyst at Alfa-Bank. So, it continues, “the volatility of ruble is very strong, and this in the volatile environment.” The factors contributing to it are: the fall of oil prices, which accelerates the plummeting currency and degrades the Russian economy already weighed down by international sanctions and capital flight caused by the Ukrainian crisis.

However, the weakness of their currency is, in Russian eyes, the first indicator of economic stagnation. “During the previous financial crisis of 2008-2009, sociologists identified reasons very well: for the people, the crisis was over in February 2009, when it went up, then it continued for a while…” says Igor Nikolayev, director of the Institute for Strategic Analysis and professor at the School of Economics Studies in Moscow.

Federal budget deficit

Friday attests flabbergasted reactions on social networks. Quoted by TASS, two banks, Sberbank and VTB24, reported having seen a demand for foreign currency in cash by individuals “three to four times higher” than usual. Meanwhile, consumption remains positive, but as is explained by Igor Nikolayev, there is another phenomenon, known as typically Russian: “They are trying to spend their money quickly because they know that tomorrow everything will be even more expensive.” “We are not yet in a deep crisis, but that’s where we are headed,” he sighs.

Mainly because of the sharp decline in oil prices, many economists indeed expect a recession next year in Russia with a GDP growth rate close to zero or even negative between – 2% – 4% while the official forecast still reported an increase of 1.2%. The federal budget, modelled on an oil price of $100, will be unprofitable, despite the many fees and charges set to face difficulties.

Twenty-two sectors should be involved, as the bill passed first reading in the Duma. “The food, the air, to pay toilets…” explains Igor Nikolayev. Already enhanced by the effect of sanctions, inflation continues to accelerate, up 8.3% in October. And while the official forecast revised the price increase to 7.5% in 2015, economists estimate it at 10%, and even “up to 12%”, according to the Institute for Strategic Analysis. “The time to panic is perhaps not yet, but it will come,” commented on his Facebook account sociologist Alexei Rochine.

Friday, speaking in Chinese media on the eve of joining Beijing to attend the Forum of Asia-Pacific Economic Cooperation (APEC), Russian President Vladimir Putin denounced “political component” in the pricing of oil, from which Russia, heavily dependent on the export of its energy resources, derives almost all of its revenue.

“During times of crisis, it seems that the prevailing policy,” said the head of state, thus appealing to question, without naming those guilty of currency manipulation, as already mentioned, in October “a conspiracy.” Finance Minister Anton Silounov, for his part, highlighted the “speculative nature” of Russian economic collapse.

However, as if it was not enough, the change of Moscow military budgets increased it by 30%, a level never seen before. “It’s huge,” concedes Natalia Orlova. “It changes nothing,” warned President Putin before officers gathered on 31 October. The threats of the past have not vanished but are still present.”

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