Research and analysis

Russia: rouble reaches historic low against dollar

Published 26 September 2014

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk – Russia

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk – Russia

Summary

The rouble has reached a new historic low on 16 S: 38.71 to the dollar. The Russian currency has now fallen by 15% since the beginning of the year. A mix of contributing factors are responsible: sanctions, concerns about the economy, the falling oil price, and reforms to the Central Bank’s exchange rate policy.

Detail

On Tuesday 16 September, the rouble fell a further 1% to reach a new historic low of 38.71 roubles to the dollar. As a result, the rouble has now fallen by 4% against the dollar since the start of September, and by 15% overall since the start of the year – the biggest fall of any major EM currency except for the Argentine peso.

Analysts suggest that four key factors are responsible for the rouble’s recent depreciation:

• First, after the EU and US sanctions restricted Russian banks’ access to sources of western financing for more than 30 days, liquidity on the local interbank foreign exchange market has dried up. Average daily volumes have fallen from around $1-2 billion a day before the restrictions to around $100 million a day at present. As a result, additional demand for foreign exchange is being satisfied through the international FX market.

• Second, the situation in Ukraine and the pre-existing slowdown in the Russian economy are resulting in continued capital flight. The Central Bank of Russia estimates that net capital outflow slowed to $25.8 billion in the second quarter of 2014, after a net outflow of $48.8 billion in Q1. But outflows are now likely to have accelerated again: Capital Economics, a London-based consultancy, estimates that outflows are likely to reach $30 billion in Q3. The outflow of capital weighs on the rouble.

• Third, the recent drop in the oil price is reducing Russia’s export revenues. As petrochemicals account for nearly half of all Russian exports, the lower price adds to pressure on the currency.

• And finally, the Central Bank of Russia is in the process of transferring to a fully flexible exchange rate policy, which it aims to implement by the start of next year. In August, the Bank made further policy adjustments towards this goal, reducing the size of its interventions on the FX market and increasing the size of the band within which it does not intervene to support the rouble. As a result, the markets are adjusting to take account of the new policy.

Potential implications

Despite the drop in the rouble, the bond markets have remained relatively stable. Media reporting is generally factual. Analysts from Sberbank and Alfa Bank predict that the currency could fall as low as 39.2 roubles to the dollar in the coming weeks – the point at which the Central Bank would resume interventions in the FX market – but that interventions would then offer “strong resistance” to any further depreciation.

The weakening of the rouble is likely to increase upwards pressure on inflation, which is already high at 7.6% and which was already projected to increase as Russia’s import ban pushes up food prices. The Central Bank decided to maintain interest rates at 8.0% at its monthly policy meeting on Friday 12 September, but many analysts now consider that the Bank will raise rates by 50bp in the coming months.

Disclaimer

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