As the price of oil continues its relentless and seemingly unstoppable march down towards $50 a barrel, there has been growing chaos in the Russian financial system. The partial calm of late December, after heavy Central Bank intervention succeeded in putting a temporary halt to the currency’s swoon, has decisively ended. Earlier today the risk of insuring Russian government bonds against default rose to the highest level since the worst days of the 2009 financial crisis, reflecting widespread concern among investors that “a cut in the nation’s credit rating to junk is imminent.” Perhaps market sentiment about Russia could get worse, but it’s hard to see how.
As you might expect, the ruble has also been getting absolutely clobbered: in early trading in Moscow it was off by more than 2% and was bouncing around near 63. It’s not quite back at the mind-boggling lows it plumbed while the Central Bank was sitting on its hands in mid-December but it’s getting awfully close. Another week of bad news from the oil market and the ruble could very well break through the all-time low it set back on December 16th.
The following chart, I hope, gives some indication of both the shocking speed and enormous scale of the ruble’s collapse. The story for a lot of 2014, even after Russia annexed Crimea and did all sorts of other terrible stuff in Eastern Ukraine, was a pretty boring one. Despite some rather dark headlines and a lot of political tension there just wasn’t all that much volatility in the currency. There were ups and downs, yes, but that’s to be expected in any currency that is fully convertible. Mostly, though, the ruble bounced around in a relatively narrow range.
The enormous swings of recent months, when the ruble has habitually gained or lost more than 2% of its value on a single day, are really quite extraordinary. And when you look at the trajectory of the past few months it would certainly appear that some kind of disaster is looming around the corner: currency collapses of this magnitude are rarely followed by economic glad tidings. If the ruble keeps losing value at this pace for much longer something is going to have to give.
The Russian authorities have already done almost everything they can to combat the ruble’s collapse. They pushed through a crushing 6.5% increase in interest rates, they’ve sold tens of billions of dollars of foreign exchange holdings, and they’ve allowed Russian banks to circumvent normal accounting rules so as to conserve hard currency. Everything, that is, except to enact full-scale capital controls,(though they have already enacted “informal” ones on a handful of big state-owned natural resource exporters).
For largely political reasons, namely the fact that the oligarch class hates the idea of capital controls and could very well revolt in the event of their imposition, the government has avoided any discussion of the issue except to promise that capital controls would only ever be implemented as an absolute last-ditch effort. Putin and his advisers have loudly and consistently voiced their opposition to capital controls, and I see no reason to suspect them of being insincere. If the government though of them as anything other than a doomsday scenario they would already have imposed them.But the Central Bank is running out of tricks. Unless the price of oil starts to rebound (or at the very least stops decreasing) sometime in the very near future, the government will be forced to impose some kind of formal capital controls. After that, which would be one of the most radical changes in Russian economic policy of the past twenty years, all bets are off.
For a week or two it looked as if the ruble crisis might have ended. It didn’t. It’s just getting started.
As you might expect, the ruble has also been getting absolutely clobbered: in early trading in Moscow it was off by more than 2% and was bouncing around near 63. It’s not quite back at the mind-boggling lows it plumbed while the Central Bank was sitting on its hands in mid-December but it’s getting awfully close. Another week of bad news from the oil market and the ruble could very well break through the all-time low it set back on December 16th.
The following chart, I hope, gives some indication of both the shocking speed and enormous scale of the ruble’s collapse. The story for a lot of 2014, even after Russia annexed Crimea and did all sorts of other terrible stuff in Eastern Ukraine, was a pretty boring one. Despite some rather dark headlines and a lot of political tension there just wasn’t all that much volatility in the currency. There were ups and downs, yes, but that’s to be expected in any currency that is fully convertible. Mostly, though, the ruble bounced around in a relatively narrow range.
The enormous swings of recent months, when the ruble has habitually gained or lost more than 2% of its value on a single day, are really quite extraordinary. And when you look at the trajectory of the past few months it would certainly appear that some kind of disaster is looming around the corner: currency collapses of this magnitude are rarely followed by economic glad tidings. If the ruble keeps losing value at this pace for much longer something is going to have to give.
The Russian authorities have already done almost everything they can to combat the ruble’s collapse. They pushed through a crushing 6.5% increase in interest rates, they’ve sold tens of billions of dollars of foreign exchange holdings, and they’ve allowed Russian banks to circumvent normal accounting rules so as to conserve hard currency. Everything, that is, except to enact full-scale capital controls,(though they have already enacted “informal” ones on a handful of big state-owned natural resource exporters).
For largely political reasons, namely the fact that the oligarch class hates the idea of capital controls and could very well revolt in the event of their imposition, the government has avoided any discussion of the issue except to promise that capital controls would only ever be implemented as an absolute last-ditch effort. Putin and his advisers have loudly and consistently voiced their opposition to capital controls, and I see no reason to suspect them of being insincere. If the government though of them as anything other than a doomsday scenario they would already have imposed them.But the Central Bank is running out of tricks. Unless the price of oil starts to rebound (or at the very least stops decreasing) sometime in the very near future, the government will be forced to impose some kind of formal capital controls. After that, which would be one of the most radical changes in Russian economic policy of the past twenty years, all bets are off.
For a week or two it looked as if the ruble crisis might have ended. It didn’t. It’s just getting started.
