What happened to the Ruble?

What happened to the Ruble

(And its consequences)

Russia has been facing a strong speculative attack. The Ruble had known some very troubled days since Thursday December 11th. This opened the possibility for a lot of Western medias to begin a huge disinformation campaign against Russia. But the attack failed and the sharp trend of depreciation reversed by Wednesday December 17th. The current strategy of the Central Bank had been severely tested but in the end apparently worked quite successfully. But, if the exchange market seems to be stabilizing we can however see problems rising for future.


What happened between December 11th and 18th.

The ruble had been the target of a strong speculative attack since Thursday December 11th. This is pretty obvious by looking at daily statistics on the MICEX. Amount traded on the FOREX rose sharply the 11th and topped on Monday 15th. The “future trade” column is here more significant that one for the day to day trade. However, by Monday 15th the amount of total trade reached 9,8 billions against 4,5 billions for Wednesday 10th.

Table 1

Movement on the Ruble-USD exchange market (billions USD)

Day to day trade

Future trade (for tomorrow)

























MICEX and Central Bank of the Russian Federation

In the same time, it is true that this speculative attack happened after weeks of constant ruble depreciation. Reasons for this depreciation are well known. First of all we have the downward movement of oil prices. The barrel went down from around 110 USD to 60 USD and this was pushing the ruble down. Then we had the amount of debt redemption accumulated by Russian private enterprises on the second semester 2014. This is where sanctions played their part in the process. Financial sanctions taken by the United States have frozen a lot of credit operations to Russian banks and enterprises. To make the required payments banks and enterprises had to sell amounts of rubles and to buy amounts of USD, pushing then down the ruble against the US dollar.

Table 2

Debt redemption of the Russian private sector (billions USD)




























Cumulative total







Central Bank of the Russian Federation.

A third factor was the increase of ruble liquidity in the economy in the last quarter, and the well-known habit to make huge payments to the population in December. These different factors would have induced a slow movement down for the ruble. This is what we have seen from early September. But, then, high-speculation entered the picture. This had to be figured out. It is now pretty obvious that some Western hedge funds and some Russian banks began to heavily speculate against the ruble. Why they did so is open to question. If pure greed could account for some actors, a political agenda was clearly playing a strong role for others. In that sense, events on the exchange market are clearly linked to the current geopolitical situation.

As a result of this speculation the ruble went down very quickly and entered a movement of free fall by Monday 15th and Tuesday 16th. The Central Bank then hiked its interest rate from 10,5% to 17% but to no effect. The movement went on and the exchange rate flirted to 77 rubles for one USD by Tuesday evening, creating a huge and understandable emotion in the Russian population.


The Russian reaction facing the speculative attack.

The Russian authorities reaction, after two days of painful hesitation, was strong. The Central Bank took some measures curbing the need for US dollars from banks and credit institution like a temporary moratorium on recognition of negative re-evaluation of securities portfolios and granted credit institutions the temporary right to use exchange rate computed for the previous quarter when calculating prudential requirements for operations in foreign currencies. Russian authorities also massively injected dollars on the FOREX and fostered a powerful rebound of the ruble on Wednesday December 17th. By doing so, they effectively “burned” a lot of speculators that have bought USD at 65-68 rubles for 1 USD and were expecting to sell them later in the day at a profit. Short-term speculators who bought USD by raising money from credit in rubles were forced to sell their USD at a higher price than the one at which they had bought the same amount. In a sense then the strategy implemented by Russian authorities worked well. It induced huge loss for speculators and pushed up the ruble till 60 RR for one USD.

Figure 1

Exchange rate of the Ruble against the US Dollar

A - Charte séance3Eng

Sources: MICEX

But this had a cost. One wonders how much USD had to be sent on the market to make the ruble to come up in the proportion it did on Wednesday. It is quite sure that Russia can afford that. Not only is the fact that Central bank reserves are quite impressive (over 400 billions USD), and the Ministry of Finance is too having ample foreign currencies reserves, but the Central Bank established a swap agreement with the Chinese Central Bank (the PBOC) which allows for swaps operations. There is no doubt market interventions could be sustained for some weeks. It is clear that Russian authorities believe that it would be enough to restore confidence.

We could hope so but there are also hidden costs. The Central Bank raised the interest rates at 17% or more than 7 points over the inflation rate. At this level it would stop cold all investment project. This interest rates is effectively strangulating the Russian economy. Paradoxically the twin movement of ruble depreciation and some sanctions implemented by Western governments are offering Russian economy its best prospect for a fast growth in many years. The import substitution mechanism is to play here a major role. But, to do so, it is important that enterprises could invest. Quite clearly they couldn’t with so high interest rates.


Central Bank strategy and the goal to quickly develop Russian industry

The process of import substitution the depreciated ruble allows could generates a huge market for the development of enterprises not only on existing goods but also on new, innovation-produced ones. From this point of view, very paradoxically, the current situation is largely favourable to innovation, enterprise creation and the development of a “free” sector, which could balance the large enterprises influence in the Russian economy. This however implies that private enterprises could invest. Of course, they could invest their own profits and they will do so. But to rely only on profits to fund investment is to imply quite a high level of inflation. As a matter of fact, investment is done in rubles at one time and enterprise turnover is done at another time. Inflation taking place in the economy from the investment date to the sell out one is to increase mathematically the enterprise turnover and then the return over investment. But one couldn’t rely only to this mechanism or we have to accept huge inflation rate, probably as high as 20% a year. This raises the issue of credit borrowing. We are to face then the problem of the Central Bank policy. Its interest rates were previously largely determined by the rate of inflation, and this was why it decided first for a 10,5% interest rates. But the willingness to cut short speculation on the exchange market made mandatory to sharply raise interest rates. This is leading to interest rates that are largely unfavourable to the development of a small and medium-sized enterprises sector. The Central Bank appears then to be the main stumbling block on the path of development of economic liberalization in Russia. What sanction have been unable to do, what even the drop of oil prices have been unable to do, that is to push Russian economy into a depression, the Central Bank policy could well do the job. It is highly paradoxical. Russia is to self-inflict what could be a disastrous shock to its economy. Now, if this hike is for just some days and if we would see interest rates going down by early January then consequences would be very mild. But, if this hike is to stay for quite long, results could be very disruptive for Russia development.


How to by-pass the interest rates issue?

This raises the possibility of another option: capital controls. Of course this idea was dismissed several times by the government and is not liked by the Central Bank neither. But they could be the near perfect answer to the current situation. They would allow the Central Bank to disconnect interest rates form the target of fighting the speculation. The interest rates could then be lowered down to levels more compatible with investment needs of private entrepreneurs. It is to be added that these controls would have to target only short-term capital movement that is only speculative capital. There is no need to introduce controls over capital flows for a duration of more than one year, and may be even 6 months. Hence Foreign Direct Investment would not be harmed. Some countries are already under such a system, notably China. But it is to be understood that there is a political cost of doing so: to be accused by Western medias of “going back to Soviet times”. Would this cost be “real” is another issues, knowing how much Western medias are prejudiced against Russia today. But still, there would be a cost.

There is however another solution. If the Russian government is strongly prejudiced against capital controls, it could try to by-pass the interest rates issues by creating special channel to cheaply fund enterprises. This could take the form of premium to be paid by the government on some interest rates paid by entrepreneurs (the government paying the difference between a normal interest rates and those now in operation). Another possibility for the government would be to directly subsidize investment-making project through budget funding. These measures are possible. But they open the possibility of wastage (how the government is to assess the future profitability of enterprises) and of course of corruption. By the way these measures would put a tremendous pressure on improving the efficiency of the Russian administration. I am not denying that administrative efficiency could be improved but I am in doubts it could be done quickly. This solution is then also having a cost.


Whatever the solution to be chosen the Russian government is to make a choice till mid-January of the next year. The good news is that it had a full 4 weeks to do so and review the different options. The bad news is that it had only 4 weeks to do so.

Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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