The Fall of the Ruble: Reasons and Prognosis

The Fall of the Ruble Reasons and PrognosisThe number two of the Russian central bank called on Tuesday, December 16 “critical” situation of the ruble in free fall for the second day in a row, promising new measures after the interest rate hike that has not appeased the market.

After a slight rise early in the day, the ruble collapsed by 20%, on Tuesday, December 16, setting new records of weakness against the dollar (80 rubles to the dollar) and the euro (100 rubles per euro). The effect that was supposed to provide the Russian currency’s sharp rise in rates (from 10.5% to 17%), announced on the night of Monday to Tuesday, the Russian Central Bank didn’t have but a very short duration.

“The situation is critical. Even in the worst nightmares we could not have imagined a year ago what is happening now,” said Sergei Chvetsov, quoted by the Interfax news agency. “After the decision to raise the policy rate, other measures of the central bank will follow.”

The continued fall of the ruble revives the memory of 1998 in the Russians, when the collapse of their currency in a few days had led to a failure of Russia on its debt.

This moment of panic also comes days before intervention (on Thursday) before hundreds of Russian and foreign journalists, of Russian President Vladimir Putin. Never since his coming to power in 2000, he faced such a situation. This voice is highly anticipated. Especially since his last reference to the subject, on December 4, during which he had highlighted the responsibility of the West, nothing has changed.

Some observers are beginning to call the Russian situation “pre-bankruptcy”. So what is the magnitude of the fall of the ruble and why is it still down?

The Russian currency has lost nearly 10% of its value in a single day on Monday. Such a decline had not been recorded since 1998. Since the beginning of the year, the ruble has depreciated by some 40% against the dollar and the euro.

The fall of the Russian currency is due both to the decline in the price of oil, a raw material which the Russian economy is very dependent on, but also to Western sanctions against Russia because of its role in the Ukrainian crisis.

But on Monday, analysts in the markets also evoked a movement of “panic fueled by a number of rumors about a return of [the] country in the 1998 Plan,” as stated Alena Afanassieva, Forex Club analyst in Moscow, quoted by Reuters.

Russia: the nightmare of the 1998 crisis

Consumer frenzy that seems to have taken hold of Muscovites is probably more than any other indicator, the most visible sign of the collapse of the ruble. For the rich, this means regular attendance of restaurants and shopping centers which are always full; for the poor, the formation of buckwheat stocks or “touchonka” (canned meat). The Russians, who remembered previous crises of 1998 and 2008, are spending as best they can. They know that tomorrow everything will be more expensive.

On Monday, the euro traded up to 66.50 rubles, a record, before falling to 64.76 rubles. The dollar stood at 51.83 for his part rubles after rising to 53.29 rubles. In just one month, the Russian currency lost 26% of its value against the euro, 27% against the greenback, more than 40% since the beginning of 2014. In July, the euro was still trading at 44 rubles. A precipitous decline that accelerated with the OPEC decision on Thursday to maintain oil production levels, despite a very low price of a barrel. In announcing the abandonment of the South Stream gas pipeline project that would link Russia to southern Europe, from Turkey where he was on an official visit Monday, Vladimir Putin, in a way, gave the signal of a major crisis.

Added to Western sanctions related to the conflict in Ukraine, the drop in oil prices plunged the Russian economy, heavily dependent on oil revenues, in a strange turmoil since the financial and economic crisis in 1998. By late afternoon, the currency Russian was a little re-keying. “Packages (dollars and euros) have been proposed to significantly lower than the market exchange rate,” notes Sergei Romantchouk, a trader of Metallinvestbank quoted by Tass, pointing, “behind this behavior players,” the Russian Central Bank. The latter had indicated there was little – after having announced in November that it would let the ruble float – it could intervene in case of “destabilizing threats.”

Public concern

The Russians, who have seen their savings melt away in a few weeks, expect the worst. And if they do not give in to panic, they curb their concern, as evidenced by the numerous exchanges on social networks. “What you do in this situation?” questioned on Monday a user on Facebook. “I’m glad I told my mother not to spend her dollars,” replied another.

Regardless of income level, the Russians share a conviction: the fall of the ruble, which nobody imagines to stop where it is now, is a harbinger of runaway inflation.

Official estimates which are constantly being revised upwards, are now expecting a 10% price increase in 2015, analysts said. The cold that settles for some is an additional source of anxiety while prices for buckwheat, like everything else, are increasing. “How do I keep it?” inquired a user. “In the freezer, or out on the balcony, it’s the same,” answers another one. “There is always some humor in conversations because there is no famine, but we do not know what awaits us,” say people in the street. “We are on the threshold of a recession,” sighs Mikhail Krutikhine, partner at RusEnergy, a consulting company specializing in hydrocarbons. Oil at 70 dollars means the collapse of the Russian economy especially as sanctions weigh heavily on investment and we produce nothing, absolutely nothing.”

The decision announced on Monday by the head of the presidential administration, Sergei Ivanov, to launch a “Made in Russia” program in all areas, to boost the production of Russian consumer goods, meets with, at best, a certain skepticism.

Measures to “stabilize” the ruble

The Minister of the Russian economy, Alexei Oulioukaïev, defined on Tuesday, December 16 measures to “stabilize” the ruble, which collapsed for the second day in a row. The government’s goal is to “come to the responsible support decision” for the central bank to increase its rate to 17%. However, this increase should have intervened “earlier”, criticized the Minister out of the meeting convened by the Prime Minister, Dmitry Medvedev.

These measures are called “to ensure a balance between supply and demand in the foreign exchange market by increasing the liquidity provided to Russian banks’ foreign currency,” he said. They also include support mechanisms for the banking sector to ensure its smooth operation and quality of credits, including “recapitalization” of some institutions.

No limitations on capital movement

While the Russian currency collapsed by over 20% in two days, the economists assure that the ruble did not fit “economic fundamentals” of today. Mr. Oulioukaev, quoted by Russian news agencies, has however defended preparing limitations on the movement of capital, a measure feared by the markets after the failure of the radical increase in interest rates by the central bank.

President Vladimir Putin had called on December 4 at the Russian Central Bank to intervene to counter the continuing fall of the currency. “The ruble cannot become an object of speculation with impunity,” he declared.

On Monday, the Russian currency has lost nearly 10% of its value in one day. Such a decline had not been recorded since 1998. The tumble came as the central bank painted a dark picture of the Russian economy for next year. In a quarterly monetary policy report, the central bank said in a scenario where a barrel of oil would remain at $60, its current level, the gross domestic product of Russia could drop from 4.5% to 4.8%. Since the beginning of the year, the ruble has depreciated by some 40% against the dollar and the euro.

The ruble stabilizes at the opening of markets in Moscow

Following two days of historic collapse that plunging the country into an unprecedented monetary crisis since Vladimir Putin came to power, the Russian currency appeared to be stabilizing on Wednesday, December 17, after starting the exchange of the Moscow markets sharply lower.

The ruble, which fell 9.5% on Monday and Tuesday from 7% despite the announcement of a drastic increase in the rate of the central bank, traded at 83.95 rubles per euro, 50 to 10 am local time Tuesday night against 85.15 rubles, a drop of more than 2% for the euro. The dollar sold nearly 1% and now trades at 67.20 rubles against 67.88 rubles since yesterday.

Flight of capital

This slight increase, taken with caution as the market is unstable and nervous because of heavy losses suffered by the Russian currency in recent days, can be explained by the latest measures taken in Russia to try to stabilize its currency. Among them, the announcement by the central bank of an expenditure of $1.96 billion on foreign exchange market on Monday, bringing its operations to more than $10 billion since the beginning of the month.

At these levels, the ruble has lost about half of its value relative to the beginning of the year, a result of capital flight caused by the Ukrainian crisis and plummeting oil prices, which is with the gas more than half of the country’s budget revenues.

What are the effects of the fall of the Russian currency?

The collapse of the currency is reflected in the evolution of prices. Inflation approach 10% year on year and is expected to reach a peak of 11.5% year on year in the first quarter of 2015.

These days, numbers that appeared in foreign currency locations was common in the 1990s. This price waltz causes a shopping fever, some Russians are pressing to buy electronics, furniture or even cars before to see their prices soar.

Russia is also confronted with a starting capital: $128 billion (103 billion euros) have “flown” in 2014, according to the Central Bank of Russia (CBR).

What is the impact of the fall of oil prices?

In November, the Finance Minister Anton Siluanov had estimated that Russia could lose up to $100 billion because of lower oil prices. However, it has since been increased.

The Russian Central Bank warned on Monday that if oil prices remain at current levels around $60 a barrel, the gross domestic product (GDP) of Russia could drop from 4.5% to 4.8%.

At this point, the Russian government plans a recession in 2015 (- 0.8%), following growth of about 0.6% this year. VTB Capital analysts said, meanwhile, that the decline in oil prices could lead to a budget deficit of 2% to 2.5% of GDP.

How do the Russian authorities react?

The Bank of Russia had adopted this doctrine to only intervene in cases of emergency. Criticized for its action which is too slow and cautious, it is now subjected to everyday stress.

Since the beginning of the month the government has spent $5.9 billion to support the ruble.

It also raised its rate to 10.5% on Thursday, December 11, nearly double its level at the beginning of the year (5.5%) before letting it go down 17% on Monday, December 15.

According to press reports, the Russian government is also preparing to cut back on spending to match the decline in oil prices. The Central Bank is seeking two things with its rate hikes. It first wants to raise the investment performance and ruble deposits so that it is above inflation. This is to prevent further transfers of the ruble against other currencies.

BCR also intends to tighten credit so that the price does not get carried any further. Tightening credit for households and businesses could weigh on an already bad Russian economy shape.

What other possible means of action can there be?

The choices made at this stage have not had the desired effect, analysts expect that the Russian monetary policy “will take a less orthodox orientation.” The establishment of a control of capital movements is mentioned, in particular.

At this point, the Russian government refused to do so, given the possibility of undermining the credibility of Moscow in the markets. President Vladimir Putin proposed a week ago a “complete amnesty” for those who decide to repatriate the capital.

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