Russia: blood on the trading floor

Note kindly translated by Anne-Marie de Grazia

The trading session has been a rough one, but turned out glorious for the Ruble this Wednesday, December 17th. It appreciated strongly against the dollar and the Euro after the catastrophic sessions of Friday, Monday and Tuesday. In the same time, the Moscow Stock Exchange, which underwent a sharp drop on Monday and Tuesday, recovered brilliantly and rose 17%. It goes without saying that one must be wary of movements on such a narrow market of stocks. Almost 90% of volumes traded are in 5 denominations only. Still, the trend is quite clear. These movements are comparable in their amplitude to the spectacular drop of Tuesday 16th. Yet they have not provoked the same commentaries, which is very revealing of the anti-Russian biases of part of the press and of the so-called “observers.” They are nevertheless interesting for what they disclose about the policies of the Russian authorities. Yet, beyond a mere assessment, one must ponder the choices made by the authorities.

The strategy of the authorities and the blood bath of the speculators.

The strategy of the government and of the Central Bank seem to be working in the short term. More than the hike in interest rates to 17%, it appears that it was essentially the commitment of the reserves of the Ministry of Finances and of the Central Bank, coupled with administrative measures targeting some banks, which has brought about this considerable rise. It is quite significant. We can see that the day before, the ruble had crashed before picking itself up again at the end of the day. This can be explained by the speculation movement which is to be detailed.

A speculator buys dollars by selling rubles he got through a credit in rubles at the beginning of the day. These movements bring the ruble down during the day, and at the end of the trading day he resells these dollars, provoking a slight rise, but one which remains at a lower level than the one at which they had been bought. So the speculator wins and makes a profit whatever the interest rates at which he borrowed the very morning his rubles. As a matter of fact the interest rates would have to be at least 5% A DAY to deter the speculator. Let’s consider that he was able to buy dollars at a price between 63 and 65 rubles and to sell them between 77 and 72 roubles, pocketing a nice profit. But on this Wednesday 17, it’s a very different scenario. Dollars are bought at between 69 and 71 rubles, in the hope of selling them at beyond 80 rubles. But the intervention of the Central Bank brings about a rise of the ruble which at 8H00 reaches 63 rubles for 1 dollar. The speculators sense that the situation is out of their hands and multiply the purchases, bringing the ruble down for a while, but the intervention of the Central Bank and of the Ministry of Finances saturates the market, the ruble appreciates sharply, and the contracts are finally “unbuckled between 62 and 60,5 rubles for one dollar, which entails enormous losses for the speculators.

Chart 1

Movements from Tuesday 16th to Thursday 18th

A - Charte séance3Eng

Sources: MICEX and Central Bank of the Russian Federation

So that these movements of December 17 imply very heavy losses for the speculators who were playing against the ruble. We will see in the coming days what will happen to some hedge funds, particularly in the United States, and to some small Russian banks, close to the circles opposed to the policies led by Vladimir Putin. It is clear that this strategy must absolutely be repeated over the coming days in order to render these losses irreversible, and by the same token rebuild the trust of the Russian population. Logically, the aim should be to attain the level of 55 rubles for one dollar because then expectations of a further drop of the ruble will be crushed. By the way, this rate corresponds more or less to the equilibrium level for a barrel of oil priced at below 60 dollars, which would reassure the population.

Figure 2

Analytical graph of RR vs USD

A - graphe rouble

Source: Courtesy of Mr. P. Murer

The cost for the authorities.

We do not know yet exactly the direct costs of this strategy. Yet it is clear that it was considerable. 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 have also certainly thrown vast sums onto the market in order to achieve their aims. They will have to spend sums just as important in the days to come, probably around 30 billion dollars a week, if they want to reach their goal. But it is clear that today, Russia has the means. The reserves of the Central Bank are above 400 billion dollars.

This is not the only cost, and one must also consider the hidden costs of such a policy. They reside in keeping interest rates high. The latter are presently at 17% per year, when inflation is around 10,5% per year. If these rates were to endure, they would strangle the Russian economy. One must therefore consider attentively that, if a policy of fighting speculation by the means of the market can be efficient, as has been proven on this Wednesday December 17, the costs, direct as well as indirect, of this policy increase rapidly. One understands that, in the thinking of the government, this strategy is not meant to last. It is clear nevertheless that the government is hoping that by next January, the downwards pressures onto the ruble will calm down. Nevertheless, if it turned out that the speculation is politically supported by some countries, this might not be the case. Then, the best solution for Russia would be to introduce rapidly regulatory measures, meaning, controls of capitals. The success of the strategy adopted by the authorities, which for the time being are refusing to consider the option of capitals controls, will bring a release of the pressures on these same authorities. But if the involvement of the Ministry of Finances and of the Central Bank should be prolonged, one would then have to reconsider very seriously the diverse possible options.

Lessons to be drawn.

One last lesson must be drawn from the events which have just taken place. This mini-crash on the exchange market has reactivated a whole unconscious of distrust in the Russian economy, dating back to the crisis of August 1998. However, contrarily to then, there never was a risk of default. In 1998, the reserves of the Central Bank were very low, around 30 billion. They are presently at 420 billion, that is, 14 times superior. Public debt was a major problem in 1998; today, Russia is one of the least indebted countries in the world, with around 9% of GDP for its public debt, which is ten times less then France. The balance of trade was in deficit during the first semester of 1998, when it is at present in excess by almost 120 billion per year, a figure close to the one of Germany.

Russian industry is developing rapidly, as one could see with the contracts recently signed with India, and as one sees when looking at the figures of automobile or aeronautics production. It is therefore profoundly stupid to compare Russia with some kind of an oil emirate. Neither did it make any sense to call up 1998 for what happened during these past few days. Still, some did, sometimes in good faith, showing that their knowledge of the Russian economy is quite limited, and other in less good faith, demonstrating a deliberate will to harm. It is important not to let oneself be guided by ideology when one seeks to understand what is happening in Russia.


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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