The rout of the rouble

For the third time since 1998, there is talk of a Russian currency crisis. The rouble has slumped by 38% this year against the Central Bank of Russia’s (CBR) euro-dollar basket. Last week was the currency’s worst in 11 years: it fell by almost a tenth.

“Capital is fleeing because President Vladimir Putin’s policies have isolated Russia and killed optimists’ hopes of reforms,” Pierre Briançon says on 

The eight-month-old Ukraine crisis appeared to take a turn for the worse last week as a ceasefire in eastern Ukraine threatened to unravel – this raises the prospect of further sanctions against Russia. These have crimped major firms’ access to international finance at a time when the economy has already stagnated.

A consumer boom underpinned by buoyant oil and gas revenues has run its course, while urgently needed investment – both domestic and foreign – is being deterred by the government’s increasingly authoritarian and cronyist behaviour.

To cap it all, oil prices have sunk to a four-year low – around $80 a barrel. Inflation, already at a three-year high of over 8%, will be driven higher by the tanking rouble.

Inflation is “one of the few factors history has shown can make Russians turn against their leaders”, says the FT.

The CBR is desperate to avoid a free-falling rouble that prompts households to rush into US dollar assets, “creating a spiral” that threatens the stability of the banks, notes Lex in the FT. In 1998, a banking crisis ultimately resulted in a sovereign default.

Today, however, Russia looks stronger: government debt is just 13% of GDP, compared with 100% back then. The CBR also has foreign-exchange reserves of $430bn, despite having spent billions trying to prop up the currency.

It bodes well, moreover, that the CBR has now effectively got rid of the dollar-euro basket and stopped throwing foreign-exchange reserves at the market in regular intervals. This should allow the rouble to find a floor in the market more quickly as it can now sink to its natural level.

The CBR has also tried to stem the rouble slide with higher interest rates – last week saw a 1.5% jump – but is likely to have to raise them further to bolster the dented appeal of Russian assets, and to keep inflation under control.

Dearer money further undermines growth. So while a crisis on the scale of 1998 is unlikely, the latest rouble rout means that the economy is facing a nasty squeeze.

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