Monday and Tuesday saw the Russian rouble lose 20% of its value against the dollar, despite bold intervention from the country’s Central Bank. Here, Paolo Sorbello examines the long-term impact of a serious currency crisis.
Even as economists around the world look on anxiously, some Russians have been joking about the crisis of the rouble, publishing a “zen” website (notice the pun between дзен, zen, and цена, prices) with ambient music accompanying the scary numbers that keep growing (RUB/USD and RUB/EUR exchange rate) and shrinking (oil price). Some Belarusians have responded in kind with their own “zero change” website. Aside from dark internet humor, however, the picture is even gloomier than it seems.
Capital flight from Russia is forecasted at around $150 billion for 2014 by the Central Bank, which acted this week to plug the hole and raised interest rates to 17%. Norway reacted similarly to the now-constant news of plummeting oil prices. However, interest for the rouble has not met the expectations: it jumped to 80 RUB/USD, then down to 68, then up again to 72. The rouble is now worth less than the hryvnia, the ailing currency that keeps flowing in the divided warzone that still is Ukraine.
According to HSE professor Natalia Akindinova, “the central bank doesn’t have the reserves to influence the market, as it did in the past crises”. The limited independence enjoyed by the Central Bank might be behind some ill-fated decisions, such as the free-float ordered earlier in November. The 17% figure for interest rates recalled another historical landmark, the 1998 financial crisis that brought Russia to its knees. Then, governments changed, another war in Chechnya was started, and a much younger Putin emerged as Yeltsin’s designated successor. Oil prices in 1998, however, were at a risible $18/barrel, not comparable to next year’s probable average of $60, especially at a time when the reserves that were cheaper to exploit are depleting.
Oil prices are an unfortunate addition to Russia’s structural economic problems, exacerbated by its heavy reliance on exports of natural resources. Russia is not a price-maker when it comes to oil, so most of its contracts are suffering from the decision by OPEC’s members to keep flooding the market. The government has resorted to protecting its major exporting companies (Rosneft and Gazprom), which bring hard currency from abroad. They are the winners of the rouble’s plunge, notwithstanding lower oil prices. They are simply “too big to fail”, as the saying goes.
The Russian population and, possibly, Vladimir Putin are set to be the losers. Imported consumer goods are a rarity and luxury now. Higher prices are likely to significantly drive up inflation, while the economy is poised to shrink by more than 4% in 2015. A disproportionate number of workers are employed in the public sector, which is generally the slowest to adjust wages, especially while the crisis requires heavy investment.
Plus, the value of pensions is vanishing, as most of those reserves are kept in roubles. The purchasing power of Russians, in sum, is falling together with the rouble. Is this likely to put a dent in the popular support for Putin? Maybe. It depends on its ability to cope with the crisis and shift the blame, most certainly towards the West (lest we forget the sanctions).
Lastly, Russia cannot even hope for a boost in trade within the Eurasian Economic Union. The venture, due to be born at the beginning of next year, will link Belarus, Kazakhstan, Kyrgyzstan, and possibly Armenia with Russia in an economic bloc. If these were equal countries in terms of size and economic development, one could speculate that a weaker rouble would place Russian manufacturing at an advantage with respect to its neighbors. But Russia in the EEU is not like Germany in the European Union: quite apart from the differences in economic networks, Russia is far richer and more populous than its partners. It is an economic hegemon that should thrive with a stronger, not weaker currency.