Ruble Trouble

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The Russian economy looks like it’s on the verge of a full-fledged meltdown. The central bank projects zero growth next year and barely more than that in 2016, while the ruble’s value has plummeted. Amanda Taub voxplains what the heck is going on:

The fall in the ruble appears to be mainly the result of two factors: a sharp decline in global oil prices and sanctions that Western countries put on Russia in retaliation for invading Ukraine. Those two things might not appear connected, but in a sense one led to the other. Many Russia-watchers believe that, when Russia’s economy began weakening, and, thus, so did Putin’s approval ratings, Putin responded in part by trying to increase his popular support by stirring up nationalism. That is likely one of the reasons why he invaded Ukraine, which also distracted from the poor economy. If that’s right, then that would mean that the sanctions meant to weaken Russia’s economy are also a result of Russia’s weak economy. And that, in turn, should prompt questions about what Putin might do to shore up his support in the face of this new bad economic news.

The Bank of Russia’s usual response to such a slump is to dig into its massive reserves to shore up the currency, but yesterday, the bank announced that it would allow the ruble to float freely:

The bank had been burning through its $400 billion in reserves to cushion the drop of the ruble, spending a reported $30 billion in October alone to support the national currency. The bank statement said the decision to allow the ruble to float freely “did not amount to a total renunciation of any interventions in the currency market, which would be possible in case a threat to financial stability appears.” The ruble had dropped to 48 to the dollar on November 7, but the Russian central bank’s November 10 announcement lifted the ruble to 45 to the dollar. Earlier in day, President Vladimir Putin expressed confidence that the plummeting ruble will stabilize, saying its volatility is not tied to the country’s economy.

Bershidsky analyzes the move:

Putin’s government isn’t interested in a strong ruble now: As low oil prices make it difficult to balance the budget and as exporters, many of them state-controlled, complain about the lack of access to Western capital markets, a devaluation is the first order of business. What Putin doesn’t need is panic among ordinary Russians, which could damage his high approval ratings. As long as the central bank does its job of reducing volatility and deterring speculators, bank insiders will be free to use information about the timing of interventions to make a bit of money on the side. And Russia has a lot of hard currency to burn — $454.2 billion in international reserves at the beginning of November.

That logic, however, only holds if one believes — as Putin does, according to Kremlin insiders — that both the Western sanctions against Russia and, more importantly, the oil price drop are only temporary. If they last longer than a year or two, Russia will be in real, long-term financial trouble and it will be harder for Putin to hold on to unlimited power.

The way Ioffe sees it, the ruble’s decline “is merely a symptom of something much deeper and more worrying”:

This is Putin digging in; this is Putin reinforcing his foxhole and preparing for the long fight ahead. He will not let go of eastern Ukraine, and he is trying to keep the reserves full so that he can survive the long fight ahead. The problem, though, is that the pressure inside the system is rising. Food prices are jumping and, though so far, Russians mostly blame the West for their country’s economic malaise, it’s not clear how long that will last. …The ruble crashing won’t change anything today or tomorrow, but this is just the system starting to eat itself, this is just the system starting to crack. As I’ve written before, historically, economic crisis triggers political crisis in Russia. No one knows when one of those cracks brings the whole thing down, but there’s a growing sense in Moscow that it will happen sooner than we all think. Putin seems intent on it.

(Chart via xe.com)