The “biggest risk” posed by the sliding rouble is to the banking sector, say Kathrin Hille and Courtney Weaver in the FT. Russian banks have little dollar income, but a large pile of foreign-currency debt amounting to around $192bn, or 10% of GDP. A falling rouble means that the rouble value of this debt rises.
The banks can’t offset this significantly with dollars, so their capital shrinks. At the current rouble/dollar exchange rate, the hit to banks’ balance sheets could be around 1.25% of GDP, reckons Capital Economics.
Then there are foreign-currency loans to Russian households to consider. These are worth $180bn, or 9% of GDP. As the rouble falls, it will cost these borrowers more to service their loans, which implies a rise in arrears and bad loans.
Finally, if there are further sharp falls in the currency, people could withdraw rouble deposits in order to switch to dollars. If enough of them do this, it could result in bank runs.
It’s not all bad news. Compared to 1998, Russia’s banks are now better capitalised, and the government is much better off. The central bank has plenty of foreign-exchange reserves to fight renewed sharp falls if it wants to, while its decision to set the currency free also bodes well for sensible policy-making.
Still, says Capital Economics, “the banking system is the place to watch for signs that a weaker currency is causing problems with the real economy”.