Russia - currency response by central bank
Published 17 December 2014
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This article is no longer current. Please refer to Overseas Business Risk – Russia
Summary
The rouble continues to slide, reaching new historic lows against the dollar. In response, the Central Bank resumes interventions using reserves and hikes interest rates by a further 100bp to 10.5%, but fails to halt the currency’s decline given the continuing oil price fall..
Detail
After depreciating sharply in November the rouble has continued to fall this month. At the beginning of 2014, one dollar bought 32.9 roubles. Today, 12 December, the value of the Russian currency fell to a new historic low of 57.9 to the dollar. The weakening oil price remains the primary factor behind the rouble’s fall, although sanctions and Russia’s economic slowdown are playing a contributory role.
The Central Bank introduced a flexible exchange rate regime on 10 November, announcing that it would only intervene in the foreign exchange markets when it perceived threats to financial stability. However, it felt compelled to resume irregular interventions from 1 December. It spent $4.5 billion making interventions last week, and has continued to intervene this week as the pressure has continued.
The weakening rouble, along with Russia’s self-imposed ban on imports of Western food produce, has pushed inflation up to 9.4% - a three-year high. At its monthly Board meeting on 11 December, the Central Bank raised its key interest rate by 100bp to 10.5% in an attempt to reduce inflationary pressures and counter rouble depreciation. It didn’t work: the currency fell to new lows shortly after the decision was announced.
Most analysts expect the rouble will depreciate further over the coming weeks, as external debt repayments fall due and the oil price remains low (and could fall further). January traditionally sees high capital outflows, which will add further pressure. Commentators therefore predict further interest rate rises. The key interest rate has already been hiked by 500bp since the start of the year, which is acting as an additional constraint on domestic consumption and investment. The Central Bank forecasts that GDP growth will be close to zero in both 2015 and 2016, after 0.6% growth this year. The Ministry of Economic Development’s view is even more pessimistic: it expects a 0.8% recession next year, with real wages falling by 3.5%.
At a press conference on 12 December, PM Medvedev warned the public that, because the rouble was now so undervalued, they could ultimately lose out if they now converted their savings into foreign currency. He stressed that he kept all of his own savings in roubles, and therefore he and the Russian people were “in the same boat”.
Comment
The key driver of depreciation remains the oil price, and the rouble’s slide continues essentially to mirror the fall in the price of crude. Until the oil price itself stabilises, it won’t be possible to judge how heavily other factors are weighing on the rouble.
Disclaimer
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