Counter-speculation on the Ruble
Note kindly translated by Anne Marie de Grazia
The day of Monday 22nd witnessed the sustained rising movement of the Ruble. It was even noteworthy by a speculation IN FAVOR of the Ruble and AGAINST the US Dollar as is proven by the movements on the exchange market. We are seeing a spectacular reversal of last week’s situation. This reversal leaves all the “experts” who, like birds of ill omen, have been relentlessly forecasting the worst for the Russian economy, with their jaws dropping. It confirms the trust that one can maintain in the fundamentals of the Russian economy, which remain quite healthy. A little explanation of what happened remains nevertheless in order.
As a matter of fact, the day begins with an exchange rate at 58 rubles for 1 USD. The speculators sell their dollars and massively buy rubles before the beginning of the session, which brings the exchange rate to fall to 56 r/1 USD within minutes, thus creating an appreciation of the ruble. It goes up after these buyings, then starts appreciating again and reaches 54,5 rubles pour 1 USD around 15h. The speculators then sell their rubles in order to buy dollars, provoking a rise of the exchange rate to 56r/1USD but the demand on the ruble is such that this depreciation of the ruble doesn’t last and it rises back, at the end of the session, to the vicinity of 54r/1USD.
Movements of the ruble against the dollar on Dec. 22
Obviously, this process is the result of the counter-attack led by the authorities since last Wednesday. It also corresponds to the formalizing of the announcement of the support of the Central Bank of China (the PBOC) guaranteeing the Central Bank of Russia, whose reserves are already considerable, that it will be able to count on the immense financial manoeuvring resources of the PBOC (the reserves of which are estimated at 4000 billion dollars). It is quite clear that there is no longer a future for a speculation against the ruble. But there are still speculators on the markets. The latter therefore decided to play in favor of the ruble. One can, and one must, consider this to be a positive sign, but a few things must be heeded:
- A speculation in favor of the ruble signals nevertheless the persistence of speculative anticipations on the exchange market. So, calm has not returned yet.
- This speculation in favor of the ruble could take the ruble too far. If it is a good thing for the ruble to return to an exchange rate comprised between 50 and 55 rubles for 1 USD, the ruble should not climb beyond 50 (maybe up to 42-45) for, in this case, there would result fiscal problems for the government. As long as the price of the barrel of oil will remain at between 55 USD and 60 USD, the normal exchange rate for the ruble will be situated between 50 and 55 rubles for 1 USD. In order for the ruble to be able to climb back beyond 50r/1USD, we must wait for the barrel of oil to climb beyond 70 USD, which should happen around March-April 2015.
- The problem risks becoming acute as early as the beginning of January. Loan-repayments of companies and of banks will be very low in comparison with what they were in December. Purchases of imported products (in USD) will dry up after the Christmas holidays. Everything is falling in place for a brutal hike of the ruble which could turn out to be as destabilizing as its brutal fall has been. Of course, such a movement can be controlled by the Central Bank which will buy dollars (and sell rubles). But, if this mechanism can allow it to shore up its reserves, it will result in injecting rubles into the economy, in a period when the inflation will be very high.
As a result of these various factors, the question of a possible control of capitals remains on the table in Russia today. The government doesn’t want to hear about a control of the exchange rates, and it is probably right in the present situation. But the control of capitals will result in letting the exchange market function freely, while regulating the amount of capitals which, coming or going, land on this market. As a matter of fact, it is already what the Central Bank of Russia has done by temporarily modifying its prudential regulations for banks on December 17 in order to limit their needs in dollars. The introduction of a regulation of the short term movements of capitals, whether entering or exiting, would then be a complementary measures to those already taken.
On Bank of Russia measures to maintain stability of
Russian financial sector
The government has two to three weeks to take these measures. They would have the immense advantage of disconnecting the interest rate from the exchange rates market. This would allow to bring down the interest rate to a level more compatible with investments, that is, bringing it back to 10,5% whereas it is presently at 17%. Otherwise the government will be forced, if it doesn’t want to sacrifice investments, to use administrative methods (such as investment subsidies or enhanced credits) in order to compensate for an interest rate that is much too high.
Russia has weathered a grave speculative attack and seems to be out the woods now. But this does not yet guarantee a return to a normal situation. If the government wants to limit as much as possible the shock on growth of this attack and put into place the conditions which will allow activities to develop while taking advantage of the benefits of a broad depreciation of the ruble, which brings back its competitiveness to the economy, it must imperatively act in a decisive way in the weeks to come.