The following opinion piece was authored prior to the Central Bank of Russia (CBR) raising its key interest rate by 350 basis points to 12 percent on Tuesday, Aug. 15.
The ruble seems to have again gone through the 100 level against the dollar, warranting much media commentary and focus.
The ruble did push through the 100 level in the weeks immediately after the full-scale Russian invasion of Ukraine on market shock about the event – many people were not positioned (it still defies me why people did not see this coming). In fact it seemed back then that even the CBR was not briefed by the Kremlin on what was going to happen. They then lost $330 billion in assets frozen by Western countries and suffered a wall of capital flight. The CBR finally got its act together, hiking policy rates in its defense, and instituting capital controls to limit flight. Eventually the ruble strengthened and as the trade and current accounts were buoyed by the huge windfall gain from higher energy prices, the ruble rallied back aggressively. Indeed, the CBR and the Russian authorities appeared to make a strong ruble a propaganda tool – that Western sanctions are not working. Look at the strong ruble.
How things have changed, with the ruble now back through 100 and selling on.
How should we view this now?
Well, a weaker ruble does help the Russian authorities to a degree by increasing the ruble value of budget revenues, thereby window dressing the headline budget deficit lower. This kind of shows that the Kremlin is having to make difficult choices now on the fiscal side – guns versus butter. A weaker ruble might also help the balance of payments by making exports cheaper and imports more expensive. That said, with most of Russia's exports consisting of commodities with prices fixed in dollars, it will hardly move the dial on the export side.
But a weaker ruble I think is now just a reflection of the underlying problem, which is that the oil price cap and sanctions are working. Much has been made of the Ural price for oil, which has been trading at a large discount to Brent and under the $60 oil price cap since its introduction on Jan. 1. Add in here that Russia has also lost the bulk of the annual €50-60 billion European gas business which is not coming back – pipelines cannot be easily diverted East. The EU was paying €12 billion per month on average to Russia for energy imports in 2022, and thus far this year that is down to €2 billion, if that. And in sum, globally in the first few months of 2022 Russian energy exports peaked around €1.2 billion a day, but by July 2023 that was down to only around €0.5 billion (data from www.energyandcleanair.org). The impact in the current account has been clear to see with the surplus for the first seven months of 2023 dropping 85 percent year on year.
The problem on the current account is not just exports but on the import side, sanctions mean that Russia is having to pay top dollar to secure essential imports. Sanctioned regimes can be quite successful at circumventing sanctions, but it costs more to import – as it is much less efficient.
Meanwhile, on the capital account, Russia continues to suffer capital flight. This is evident from partner data for countries like Turkey, the UAE, and those in Central Asia and Transcaucasia. In the latter, since the war began, capital flows from Russia and worker remittances have increased in multiples. Take Armenia as an example, in the months before the invasion, remittance inflows from Russia were running around $50 million a month, at present they are running at 5 times this level, and actually peaked at 10 times this level. Similar trends are evident for Georgia, Uzbekistan, et al. These are not Armenians working in Russia sending money home, it is Russians figuring out ways to get money out.
So the ruble is getting hit above (current account) and below the line (capital and financial account).
Meanwhile, Russian reserve assets have been depleted by Western CBR asset freezes, and while the CBR reports official FX reserves of $585 billion, $330 billion of this is frozen in Western jurisdictions and a balance of the rest is likely in soft currencies and gold. Not very usable in defence of the ruble.
As noted above, while there are some benefits from a weaker ruble, from a PR/propaganda perspective, it’s a disaster for Russia, so there is no way the Russian authorities would allow the ruble to depreciate unless the economic situation were pretty dire. And I think that is the reality. The ruble's weakness is the clearest signal yet that Russia’s invasion of Ukraine has been an economic disaster for Russia, as well as a defeat on so many other levels for Putin – militarily, strategically, diplomatically, prestige-wise, human, et al.
It is notable now that the blame game has begun with Russian state-controlled TV now criticising the CBR for allowing the ruble to weaken. One has to assume that Nabuillina will be made the scapegoat. I hear Prigozhin is out of a job, perhaps he could replace her, as he seems to be good in managing complicated FX transactions in dodgy jurisdictions.
I assume that the CBR will respond with policy rate hikes and capital controls – the latter will just accentuate capital flight in the short term and be very distruptive for the functioning of the economy. But the core of the ruble’s weakness is the disastrous war being waged in Ukraine. Economic policy cannot do much about that.
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