The ruble is trading at RUB97 to the dollar this morning, so it’s not out of the woods yet. Capital Economics says that after a devaluation event it usually takes about five days for the currency to find a new equilibrium so there’s a few more days to go.
However, analysts are already saying that things have not gone back to normal yet, and the shock of the devaluation and yesterday’s rate cut are going to have a significant impact.
I think it’s fairly safe to say that the whole episode has put Russia’s economy back by at least a year – probably two. For example, last week the CBR was expecting inflation to fall to 4% in the first half of next year, and amazingly the day before the emergency meeting for the first time started to talk about a new inflation target of 3%. Now the 4% target won’t be reached until 2025, if then.
I post a comment in which Liam Peach, an emerging market economist with Capital Economics, gives his take on the shock and details some of the problems the whole affair has highlighted.
However, I'm taking all this with a pinch of salt. The emergency rate hike has generated reams of doomcasting commentary, but I’m not sure it’s really that bad. Sure, Russia has taken a hit just as things were going pretty well. CBR governor Elvia Nabiullina released an outlook last week saying that Russia was back on a stable economic trajectory which looks silly now. But actually the economy is doing pretty well and the outlook for the rest of the year remains pretty positive. The hit it took is not that bad.
As a veteran of many crises – I make this one my ninth major crisis – you become inured to them after a while. More importantly, in a piece I wrote three years ago on the history of Russian crises one of the takeouts is each one does less damage than the last and the recovery times are getting shorter and shorter.
The thing with Russian crises is there is an institutional bias to ham them up: in general, as the press loves a crisis, and in Russia in particular, to play to the constant trope of “Russia is about to collapse” which happened in 1991 and not since. For example, everyone reported in detail on January’s disastrous budget deficit, but no one reported on June’s surge in budget revenues that took the deficit back below 2% of GDP to 1.8% of GDP in July.
Personally, I think Nabiullina was just unlucky and underestimated the psychological importance of the ruble getting to RUB100 to the dollar. Had there been a monetary policy meeting in August it would have been held right now and she could have put through the 100bp hike that she was intending to put though at the September 15 meeting – plus added say 50bp to calm things down. But there is no meeting in August so she has to call the much more dramatic “emergency meeting” to do what she was going to do anyway.
And is it really an emergency? Everyone is picking out the problems – rising capital flight, shrinking current account deficit on falling revenues, rising inflation and heavy military spending, etc.
But how bad are any of these problems in the grand scheme of things? In 2008 and 2009 the inflows of capital reversed after the Great Crisis and Russia lost over $155bn a year for two years. Capital flight now is nowhere on that level.
The current account is shrinking and was about $9bn in the second quarter, down from just under $80bn a year earlier. But last year Russia earned double the previous all-time record current account surplus of 2021 so a more “normal” surplus comparison should be around $20bn – and that is comparing to 2021, which was an especially good year. This year is still down on that of course, but as I have argued elsewhere, that is because from the introduction of the February 5 oil sanctions it took four months to reroute the oil flows to Asia and you get a hole in oil revenues while that is going on – which came to an end in June…
The outlook for the current account is good, as everyone expects oil revenues to pick up in the second half of the year. The price of Brent this morning was $84.5 and Urals is up to $72.6 per barrel. Moreover, there is talk of oil going back to $100 later this year if the Kingdom of Saudi Arabia (KSA) gets its way.
In many commentaries I have seen the oil sanctions are given the credit for collapsing the oil revenues and current account surplus, but as we have reported at length, Russia’s oil business is currently operating entirely outside of the sanctions regime. The Kremlin is not getting $60 for its oil. It is getting $84.5, minus some small discount (last reported at only $4). Now the Asian tanker loop is established the revenues should recover.
Another problem is many have equated the fall of the ruble to some sort of economic implosion that will doom Russia’s economy. The problem is that since Nabiullina took the brave decision to completely free the ruble in the midst of the last currency crisis in 2014 the ruble is supposed to fall when you have a problem like the oil transport dislocation that happened starting in February. The point is the currency adjusts and absorbs the pain but then recovers. A collapsing ruble in this case, while very painful, is a good thing.
And this is a crucial point: note that Nabiullina has not intervened in the FX market at all. Moreover, she has made it very clear she will avoid this at all costs (although she may be forced to a bit in the coming weeks to coax the ruble out of its current funk). She didn’t intervene in 2014 either; that is why she freed the ruble as she didn’t want to burn through her reserves for the sake of a nice exchange rate. Ask Turkey if defending the FX rates is a good idea. Turkish President Recep Tayyip Erdogan has basically run out of money completely now, whereas Nabiullina has kept her honeypot intact again.
Can she intervene? Here too many have pointed out that half of Russia’s $600bn have been frozen and are not available. But that still leaves $300bn available and that is a hell of a lot. Russia could pay off all its external debt and still have $100bn left over. Given Russia’s imports in 2022 were $240bn, then $100bn is enough to cover four months of imports, more than enough to ensure the stability of the ruble.
Moreover, this is not counting the RUB6.8 trillion ($81bn) in cash in the National Welfare Fund (NWF), which is enough to cover more than three months of imports, or the RUB17 trillion ($176bn) in banking sector liquidity that can be tapped that is the equivalent of seven months. There is more than enough cash in Russia for the CBR to intervene if it wants – and the markets are so thin now that it would not take much to move the exchange rate dramatically.
Still, now the rate hike has been put through, the damage has been done and the remont (repairs) will begin. Bloomberg reported there was a meeting on Monday to discuss the possible return of the mandatory FX earnings surrender requirement for exporters. Interfax reported that 70-80% of foreign exchange earnings could be demanded. The CBR imposed this rule in the first month of the war. It’s an extreme measure that was used for years in the 1990s. Nabiullina removed this rule as soon as she could and is unlikely to reintroduce it unless things get really crazy – but it’s another tool at her disposal. The capital controls meeting broke up without making any decisions, the wires reported.
So now we wait. The exchange rate will be a bit clearer next week. There will be some tax tweaking and probably a little spending in the next month. There will probably be another fine-tuning hike at the September 15 meeting. And the government will sit back and wait for those extra oil revenues to flow in and calm everyone down.
Of course, all this means that if the West were serious about bringing Russia to its knees by using oil sanctions, now is the time to do it. Dropping the oil price cap level to $35, as many have called for, and very strictly enforcing the sanctions by even going after countries like China and India, would cause chaos in Russia’s financial system. Despite her sterling reputation, Nabiullina just screwed up badly and made Russia more vulnerable now than it has been at any time since the first months of the war.
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