To paraphrase Mark Twain upon reading his own obituary, “Reports of the ruble’s demise have been exaggerated.” A week ago as the ruble skidded 17% down and briefly traded at almost 80 to the US dollar, commentators were ready to add the ruble to a long list of currencies that cratered in crises. As seen in the chart, the ruble has staged a recovery and now trading at about 55 to the dollar, where it was at the beginning of December. Oil, the supposed cause of the ruble’s weakness hasn’t staged a similar rebound.
The rebound owes its success to a combination of traditional and novel policy moves and unexpected forbearance by investors. The initial response from the Russian central bank was to jack up interest rates by 6.5 percentage points to 17%. This woke everyone up, but didn’t slow the ruble’s slide. The bank’s second move was to buy rubles in the forex markets – an effort which was successful in stemming the collapse for the moment. Usually investors greet a currency crisis by pulling their money out as quickly as possible. However, shares outstanding in one of the largest western ETFs investing in Russian stocks didn’t drop as investors held their ground. One factor encouraging hope for the ruble is the substantial foreign currency reserve position, cited as $400 billion, held by Moscow.
Some novel steps were taken in the last few days. A currency swap agreement between the Peoples Bank of China and the Russian central bank was re-confirmed. This assures additional foreign currency available to support the ruble if needed. However, further efforts to hold or boost the ruble will probably require more buying of rubles in the forex markets. Recognizing this, the Russian government is telling some state supported corporations to sell their own foreign exchange reserves over the next few months. (link here) Additional efforts urging private sector companies in Russia to sell reserves and buy rubles are expected as well. The Russian central bank also rescued a local Russian bank facing severe financial difficulties in a move that suggested more confidence on the part of Russian authorities than some expected. Amusingly, the bank is question uses the American movie actor Bruce Willis in its local (Russian) advertising.
The ruble’s rebound and current stability is certainly welcome news to Russia and the Russian government. However, as Putin indicated in a recent speech, Russia faces a deep recession over the next year or two. Without a rebound in oil prices, it is likely to experience a large fiscal deficit and further economic challenges. This will mean more pressure on the ruble. The currency crisis is contained for the time being, but the risk of a deeper economic crisis remains.
This article was written by David Blitzer, chairman of the index committee, S&P Dow Jones Indices.
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