Where’s the shock and awe?
The ruble plunged 3.8% on Wednesday to a new all-time low of 81.825 rubles
to the US dollar, blowing through the previous catastrophic panic low of
December 2014. At the time, the Ministry of Finance and the Central Bank
deployed desperate, and ultimately very costly shock-and-awe measures to stop
the ruble from spiraling out of control. And it triggered all kinds of drama.
On December 16, 2014, the Central Bank announced that it increased its
benchmark rate by a brutal 6.5 percentage points to a dizzying 17%, after
having already jacked up rates in the prior week to 10.5%. And the Ministry
of Finance announced it would begin selling Russia’s crown jewels, its
dwindling foreign currency reserves, and with the proceeds mop up rubles.
It seemed to put a floor under the ruble for a few blinks of an eye, but
then the ruble crashed 20% in no time, hitting 80 rubles to the dollar for a
few moments, and it was going to be the end of the world, but then the ruble
reversed course and spiked higher.
Today, there’s no such drama. The ruble is now lower than it had ever
been. It has plunged 25% against the dollar in just three months and is down
63% since early 2013. Back then, it took 29 rubles to buy a dollar. It
took 62 rubles three months ago. It takes 82 rubles now:
But there were no big announcements and no shock-and-awe moments. Instead,
the Ministry of Finance and the Central Bank sat on their hands and let it
happen. But Central Bank Governor Elvira Nabiullina did show up on TV in an interview to soothe her compatriots’ rattled nerves.
After all, it was their money that was getting destroyed, and she owed them a
few mollifying words.
The ruble is close to its “fundamental levels,” she said. “We will
intervene only if we see risks to financial stability. There aren’t such
risks now.”
The ruble doesn’t matter. She’s talking about the banks. Some of them already got bailed out. During the ruble crash in December 2014, it was National Bank Trust, which had been toppled by panic buying of foreign currency and a surge in deposit withdrawals. The state-owned Deposit Insurance Agency took over the bank with funds provided by the Central Bank.
No one wants to see another bank topple. But that bailout was likely a lot cheaper than propping up the ruble for months or years. It’s easy to run down a currency. It’s expensive to prop it up after it started crashing.
So they won’t intervene. Let the ruble go where it wants. Russia has enough problems. The foreign currency reserves could be used for more useful things than propping up the ruble for a little while. And hiking interest rates brutally, like last time, would be suicidal for the economy.
During the three month that the ruble plunged 25%, the price of Brent oil plunged 40%. This ongoing collapse of oil along with the decline of the price of natural gas in Russia’s key markets has whacked the economy. The sanctions haven’t exactly helped. The national budget, which relies to a large extent on oil and gas revenues, is on the chopping block. The economy shrank for five quarters straight, and more shrinkage is expected in Q4.
In its World Economic Outlook, released on Tuesday, the IMF estimates that Russia, “which continues to adjust to low oil prices and Western sanctions,” is going to remain in recession in 2016. It estimates that GDP fell 3.7% in 2015 year-over-year and is going to fall another 1% in 2016. That would be 2.5 years straight of recession!
But the IMF is always optimistic in its economic projections, and as reality gets closer it adjusts its views downward. For instance, in its World Economic Outlook released six months ago, the IMF estimated that the economy would shrink 3.4% in 2015 and grow 0.2% in 2016. So its current projection of a 1% GDP decline in 2016 may well be the rosy scenario.
Inflation was 12.9% in December. Russian consumers are groaning. But the swooning ruble means that imported consumer goods, and that’s a lot of them, will get more expensive. Hence, inflation will get worse. A deep, long recession even as inflation is raging is a toxic mix.
To repress inflation, the Central Bank would normally jack up rates at every meeting. And to prop up the ruble, it would normally raise rates unexpectedly. Shock and awe! But the Russian economy can hardly digest shock-and-awe measures.
The benchmark one-week repo rate has been at 11% since August. At the last meeting on December 11, the Central Bank indicated it might cut rates at the next meetings (one is coming up on January 29) if inflation softens in line with forecasts.
Those forecasts have been obviated by events. Now the ruble is plunging, and inflation might take a big jump. Given these risks, First Deputy Governor Yudaeva already said she couldn’t “completely” ru
The ruble doesn’t matter. She’s talking about the banks. Some of them
already got bailed out. During the ruble crash in December 2014, it
was National Bank Trust, which had been toppled by panic buying of foreign
currency and a surge in deposit withdrawals. The state-owned Deposit
Insurance Agency took over the bank with funds provided by the Central Bank.
No one wants to see another bank topple. But that bailout was likely a lot
cheaper than propping up the ruble for months or years. It’s easy to run
down a currency. It’s expensive to prop it up after it started crashing.
So they won’t intervene. Let the ruble go where it wants. Russia has
enough problems. The foreign currency reserves could be used for more
useful things than propping up the ruble for a little while. And hiking
interest rates brutally, like last time, would be suicidal for the economy.
During the three month that the ruble plunged 25%, the price of Brent oil
plunged 40%. This ongoing collapse of oil along with the decline of the price
of natural gas in Russia’s key markets has whacked the economy. The
sanctions haven’t exactly helped. The national budget, which relies to a
large extent on oil and gas revenues, is on the chopping block.
The economy shrank for five quarters straight, and more shrinkage
is expected in Q4.
In its World Economic Outlook, released on Tuesday, the IMF
estimates that Russia, “which continues to adjust to low oil prices and
Western sanctions,” is going to remain in recession in 2016. It estimates
that GDP fell 3.7% in 2015 year-over-year and is going to fall another 1% in
2016. That would be 2.5 years straight of recession!
But the IMF is always optimistic in its economic projections, and as reality
gets closer it adjusts its views downward. For instance, in its World
Economic Outlook released six months ago, the IMF estimated that the
economy would shrink 3.4% in 2015 and grow 0.2% in 2016. So its
current projection of a 1% GDP decline in 2016 may well be the rosy scenario.
Inflation was 12.9% in December. Russian consumers are groaning. But the
swooning ruble means that imported consumer goods, and that’s a lot of them,
will get more expensive. Hence, inflation will get worse. A deep, long
recession even as inflation is raging is a toxic mix.
To repress inflation, the Central Bank would normally jack up rates at
every meeting. And to prop up the ruble, it would normally raise rates
unexpectedly. Shock and awe! But the Russian economy can hardly digest
shock-and-awe measures.
The benchmark one-week repo rate has been at 11% since August. At the last
meeting on December 11, the Central Bank indicated it might cut rates at the
next meetings (one is coming up on January 29) if inflation softens in line
with forecasts.
Those forecasts have been obviated by events. Now the ruble is plunging,
and inflation might take a big jump. Given these risks, First Deputy Governor
Yudaeva already said she couldn’t “completely” rule out a rate increase.
But higher rates would be bad for the deeply troubled economy. So for
now they’re sitting on their hands, mumbling under their breath that there
can’t be any shock-and-awe interest rate hikes to prop up the ruble, and that
the foreign exchange reserves are to valuable and scarce to blow on the
ruble, and that the overall economy was more important than the currency or
inflation, and so it seems, they’re saying, to heck with the ruble. And
traders have figured this out too.
Perhaps it is this sort of scenario that is worrying the Bank of Canada.
The fear of “currency instability” is now cropping up in Canada
after the loonie has plunged 33% in two years against the US dollar.
Read… Canada
Rebels against the Destruction of the Loonie