Rouble Trouble: Russian Rouble Crisis & How to Solve It…

The year 2015 doesn’t seem to bring much good news for the Russian economy as the rouble crisis continues in the wake of staggering global oil prices. If this trend continues, Mr. Putin is facing an imminent threat of both recession and internal inflation, similar to something that happened in 1998.

All events that have happened in the past year or so have contributed to the rouble’s worst downfall since the financial crisis 17 years back. What actually set things in motion is a debatable issue, but most would agree that it was a combination of both political turn of events and the economic conditions. A series of events, both in and out of the country has led the soviet on the brink of this complicated situation of recession and inflation simultaneously.

Dollar debt-ridden domestic oil and gas firms: The 9th largest economy has always looked upon its oil exports, which form two thirds of the country’s total exports, as a source of dollars into the economy. Many of these hydrocarbon exploration and refinery firms are either owned by the state or indirectly funded via state managed banks. These firms, however, have also acquired foreign debt better known as dollar debt. Moreover, many European companies and investors have major stakes in Russian energy giants which exposes them to the risk faced by the firms themselves. For example, British Petroleum Company Ltd., has a 20% stake in Rosneft, the largest oil producer in Russia (25% of the total annual production) will also be exposed for Rosneft’s liabilities in that proportion.

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Global Oil Price War: The US oil and gas firms have added almost 700,000 barrels/day to their last year’s production levels to reach an output level of 9.3 million barrels/day. Newly found shale gas reserves and almost double oil production in US compared with last year has triggered a price war due to global oversupply of crude oil. The crude oil prices have been sliding consistently since last June hitting the lowest in last five years in January when it was almost $50/barrel (down by 55%). The OPEC has refused bluntly to cut production even if prices drop to $20/barrel, making the situation even more competitive. The Saudi Arabian oil minister Ali Al-Naimi is determined to persist with the production, adding to the woes of countries like Russia, dragging the rouble further down as profitability margins erode.

Inefficient Central Bank Policies: The Central bank of Russia steps to stop the spiraling down of the rouble, some even desperate like the midnight hike in interest rate by 650 bps and increasing the yield on government offered bonds, neither of which worked as much as they would’ve liked. The recent bailout package to provide 1 trillion roubles has considerably weakened the foreign reserves to $338 billion from $511 billion in a year. Although fundamentals of the banking system remain strong, now it’s not about the number game anymore. The sentiments, of both the foreign and domestic investors, is turning foul causing constant leakage of dollars out of the country. Mr. Putin, inspired by Malaysia who faced a similar situation in 1998 during the great East Asian Financial Crisis, is determined to introduce capital controls in the country which limits the amount of currency citizens can carry out of the country. So far, however, all those measures are proving to be either ineffective or impractical.

Ukrainian Problem: On political front, the more concentrated form of economics, the picture is even murkier. U.S. and European Union has imposed various sanctions on Russia, for violating the territorial integrity of Ukraine, making it extremely difficult for Russian firms to borrow from abroad. Ukrainian army have also been sanctioned arms and other defense equipment from U.S. which will only intensify the conflict with the Kremlin. All foreign investors, especially the British and other European countries are fleeing from Russian oil companies, selling their stakes, further draining dollars from the economy. While the President is blaming the U.S. and the West for its condition, he has denied any speculation of creating an empire within Eurasia.

“The USA, which has implemented sanctions against Russia, is sawing at the branches, upon which they are sitting,” President Putin

Faltering economy: Inflation at an all-time high of almost 11% in December, S&P’s rating of Russian credit as “junk”, contracting GDP (almost 5.5% in 2015) and increasing deficit has brought the Russian economy to its knees even though Mr. Putin and his financial advisors may claim otherwise. Ban on imports of food-grains, beef and fish in response to US sanctions has cut down on the import bill but encouraged people to buy more dollars to protect their earnings. The gold and forex reserves have fallen by almost $15.7 billion since June 2014. The problem on the streets of Moscow is such that, the shopkeepers are adjusting their prices of goods frantically to offset any fluctuations in rouble dollar rate adding to the chaos of everyday lives of people.

Reviving the Rouble: All efforts so far to stop the rouble from falling further have proven to be ineffective. Central bank’s decisions of overnight increase in rates by an exorbitant rate from 10.5 to 17%, informal capital controls which limit the amount of currency that can be carried out of the country by its citizens and other methods have done little to pick up the rouble from almost $80 in mid-December to stabilize at around $65 in January. Russians might have to bite the bullet in order to see a stable and strengthening rouble in the future.

Although the fundamentals of the Russian economy and Central Bank of Russia remains strong, it is the sentiment of investors and stakeholders which has taken a beating in the recent times.

Many unfavorable factors like geopolitical tensions and falling crude oil prices have caused the rouble’s downfall and it is too much, even for the staunch will of Mr. Putin, to battle on two fronts simultaneously while people steadily lose their money and confidence. Russia has to seriously consider its political stance towards Ukraine issue as it is difficult to negotiate anything else while U.S. and Russia stand at cross purposes. The best alternative may be to introduce strict capital controls and changing the Government bond yields to absorb much of the dollar outflow. It may prove difficult to abide by given the state of things, but it is necessary nonetheless to put a stopper in the constant leakage of dollars out of the country. Regaining investor sentiments is another issue which needs to be sorted to help the economy out of the current situation. Indeed, ministers have presented Putin with a $21 billion anti-crisis plan in the form of subsidies to agriculture, medicine, small industries along with regional tax breaks. These funds are arranged from the National Wealth Fund in order to revive the rouble which has apparently hit a support level of 65/dollar.

“It seems that we’ve touched the lower boundaries of those risks which we came up against at the end of last year. The adaptive potential of Russian businesses and sectors is starting to show.” said Russian Economy Minister, Alexei Ulyukayev

It is a difficult road ahead of President Putin to maintain his reputation and prevent another major setback for Russia and will take considerable efforts on his part for making the right and timely decisions.

References:

Business Insider http://www.businessinsider.com/r-russian-government-presents-putin-with-21-billion-plan-to-tackle-crisis-2015-1#ixzz3PdFyHO49

World Bank Database https://www.data.worldbank.org

U.S. Energy Information Administration http://www.eia.gov/countries/cab.cfm?fips=rs

International Business Times http://www.ibtimes.com/russias-gdp-estimated-contract-55-2015-impacting-armenias-economy-moodys-1785574

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Rouble Trouble: Russian Rouble Crisis & How to Solve It…

by Gaurav Andhansare time to read: 6 min
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