Russia's Rouble Crisis: Temporary or Definite Turnaround?

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Soon, the rouble rate dynamics will shift toward weakening Russia’s currency, suggests Maria Pomelnikova

By Ivan Shlygin, May 11, 2015

Last year’s decline of Brent oil prices and its continuation in early 2015 brought about the plunge of the ruble against U.S. dollar and euro. The drop was also spearheaded by the Western sanctions on Russia that have spurred capital flight. The ruble was dealt another blow by the Central Bank’s switch to the floating rate, which was accompanied by the cancellation of interventions. As a result, in mid-December last year, the ruble lost more than 100 percent of its value to the dollar and euro, reaching the lowest point at rates of 80 rubles per dollar and 100 rubles per euro.

These events caused widespread panic among individuals and legal entities dealing with rubles. Fearing further devaluation of their ruble savings, Russians frantically stormed exchange offices to buy hard currency. However, it should be noted that the abrupt weakening of the national currency was caused to a large extent by the actions of the Central Bank and stock market players.

The situation heated up to the point where everyone including Russian President Vladimir Putin and law-enforcement agencies' officials began to discuss money market issues and the weakening ruble. The chief of Russia’s Investigative Committee Alexander Bastrykin had proposed to introduce tougher penal liability for offenses such as manipulation and insider activities by inserting a clause “committing activities in the currency market” in appropriate articles of the Penal Code.

The Central Bank decided to fight unfair dealers by sharply increasing the key interest rate from 10.5 percent to 17 percent. Later, the banking regulator reduced the rate to 14 percent. According to experts, the comfort zone ranges between 8 and 10 percent.

Rapid Growth

After that, certain banks’ gloomiest forecasts projected rates of 100 rubles per dollar and even more, but since the beginning of this year the ruble has been getting stronger, not always in parallel with oil prices. This puzzled analysts and industry experts as they had used to explain any changes in the ruble quotes solely by the events related to “black gold.”

In this situation, it is necessary to use other factors important in shaping the ruble rate, such as foreign currency revenues of petroleum companies, which have to exchange them for rubles, so they can pay taxes. In addition to individuals, medium-size and large corporations were also buying dollars and euros in panic, which resulted in excessive foreign currency reserves, which are now partly being exchanged for rubles. Another demand-influencing factor is the interest in purchase of Russian securities, which have also become cheaper and attract buyers who could make profit through their re-sale, share dividends or coupon payments in case of debentures or Eurobonds.

It needs to be noted that the Bank of Russia had to take steps in early April to tighten the ruble growth by increasing the rate of hard currency repo to LIBOR+1.5-1.75 percent instead of the previous LIBOR+0.5 percent.

It was necessary for the purpose of meeting the goals set in the sequestered 2015 budget, which projected the annual average