Speculation on the Ruble
Note kindly translated by Anne-Marie de Grazia
Le Ruble has been under hard attack yesterday, Monday, and underwent a new, considerable decrease in value. In reaction, the Central Bank of Russia raised its prime lending rate from 10,5% a year to 17%. This reaction, the logic of which is understandable, runs the risk of being insufficient. Considering the nature of the speculative attacks to which the Ruble is being subjected, only measures of capitals controls will be able to bring calm back onto the currency exchange markets.
I. Clearly a speculative movement.
It is clear henceforth that the Ruble is being subjected to speculative attacks. The structural causes of its drop are known :
- (1) Drop in the price of oil.
- (2) Debts in Dollars of Russian companies and necessity for these companies to repay 120 billion Dollars during the second semester of 2014.
- (3) Increasing scarcity of Dollars on the Russian market because of the financial sanctions imposed by the United States and applied by numerous European banks.
- (4) Temporarily, a hike in the demand for Dollars in order to pay for the import of luxury goods on the occasion of the Christmas celebrations.
These causes can be read in the following charts.
Volumes on the exchange spot-market
Volumes on the exchange market – futures market (one day)
Sources : charts 1 et 2 – Central Bank of Russia and Interbank Market of Currencies Exchange (MICEX-MMVB)
But we also know that the downward pressures should have lessened, or even have reversed themselves at the beginning of 2015. The repayments by Russian companies will decrease strongly in 2015 and one can conjecture that the price of the barrel of oil will go up in February, because of the risks to which its decrease exposes the American economy. Nothing can justify the recent movements, nothing if not speculation. The amplitude of the recent movements betrays speculations on the part of Russian actors, but also of foreign ones. It is speculative short-selling which has provoked the brutal fall of the Ruble on Monday, January 15.
Debt redeeming (billions US dollars)
Source: Central Bank of Russia. Estimate of the positive balance of the trade balance of Russia at 10 billion a month.
II. A logical reaction, but possibly an inefficient one.
In this context, the decision taken during the night of 15 to 16 December by the Central Bank of Russia is perfectly understandable. In order to crack down on speculation, it increases sharply the interest rates in order to make the Ruble more expensive to buy. Agents which might take up loans in Ruble in order to exchange them into Dollars will have to pay much higher prices. But a rate of 17% per year is not dissuasive in this kind of speculation, where positions are taken at a one day, or, at most, a one week rate. The CBR will then either have to continue hiking its interest rates, or drown the market with massive Dollar sales, in order for the Ruble to appreciate brutally and catch the speculators off-balance, making them lose a lot of money.
This is a possible strategy, the foreign currencies reserves of the CBR are largely sufficient, but it is a costly one. The amounts which the CBR will have to agree spending could go into 100 billion Dollars within a few weeks if it wants to hurt the speculators. On the other hand, such a steep hike will have very negative consequences on the economy, at a moment when many Russian companies are seeking to invest in order to develop the production of substitutes for imports. Under such conditions, either this will be a short term policy and we’ll see rapidly what happens on the exchange market, or the CBR will have to resolve itself to introducing controls of capitals, as we have been advising it to do over the past months.
III. Capital Control measures are more efficient.
It is known indeed that capitals controls measures are efficient weapons when facing a market subjected to speculative movements. The amplitude of such a speculation leads to considerable movements of capital, which are perfectly identifiable, and which can be forbidden, or entail dissuasive penalties. On the other hand, controls of capitals bring about a disconnection of internal interest rates from those of the international markets. It becomes possible then to decrease the interest rates, which is profitable for the industry and for entrepreneurs.
Measures of this type have been successfully applied in several countries. They are forthwith recommended in this type of situation by the IMF and by many economists. But it is clear that this is a political decision. The CBR had, in October, ruled out resorting to this type of measure. It will have to very rapidly adduce proof that the weapon of interest rates can be efficient. If not, it will have to put into place very rapidly (by next week) an efficient mechanism of capitals controls.