As expected - the CBR was forced today to hike policy rates by 350bps to 12% to head off a melt down in the rouble.


There are two narratives on the weak rouble.


One put out by Kremlin apologists, from what I can make out, is it’s all nothing to worry about, the weakness of the rouble is managed in an effort to prop up the budget by increasing the rouble value of much diminished oil revenues [sic, which they don’t say is because of sanctions].


And the one I adhere to is that rouble weakness is the inevitable consequence of Putin’s disastrous and failing war in Ukraine, and sanctions, which have finally subdued energy export receipts, increased the cost of imports, accelerated capital flight and frozen and eroded the central bank’s access to FX reserves to defend the currency.



I would counter the first explanation further by noting that no country or central bank aspires to currency weakness as it implies broader failings or weakness across a country’s macro and or macro policy.


On the contrary a strong currency is seen as a sign of the inherent health of a country and its economy. And central banks or governments allow their currencies to adjust weaker because things are not working well and it’s a suboptimal countermeasure or policy response when it’s not possible to rectify the root cause of the problem.

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In non war economies typically it is a lack of competitiveness or unorthodox monetary policies (as in Turkey with negative rates). In this case it’s the war and the MOF and CBR are like rabbits in the headlights of Putin’s war making in Ukraine.


But one thing is clear - as long as the war continues it just gets worse for Russia, the Russian economy and the rouble. Hiking policy rates won’t solve anything - they might temporarily slow the pace of depreciation of the rouble at the price of slower real GDP growth - unless the core problem, the war and sanctions are resolved.



Reprinted from Timothy Ash’s blog @tashecon blog. See the original here.

The views expressed in this opinion article are the author’s and not necessarily those of Kyiv Post.

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