Russia Central Bank Is Protecting Foreign Reserves. That's Why It Can't Defend the Ruble

They are needed to cover the debt repayments of state-owned corporations that have been cut off from international credit by sanctions. In the mean time the bank is reasoning the market will eventually find the true value of the ruble on its own

MORE: Business

This is an excerpt from an article that originally appeared at Business New Europe

The generally accepted theory on the CBR's inaction is that the US/EU financial sanctions have been far more successful than Russia at first anticipated; with more than 1.8 years of hard currency reserves in the bank, Russian President Vladimir Putin calculated Russia could tough it out. However, now the CBR is called on to burn through about $10bn a week ,that cash pile doesn’t look quite as big.

The focus changed about two weeks ago at the CBR when it stopped intervening and allowed the ruble to sink unhindered as the hard currency reserves have become a "strategic resource".  

The CBR preferred to let the ruble slide so that it could keep its cash to support the banking sector and help cover an estimated $150bn of debt repayments that come due next year – mostly money owned by big state-owned corporations that have been cut off from refinancing their debt on the international capital markets by financial sanctions.

Oil prices fell to below $40 in 2009 and caused none of the panic that Russia is currently feeling.

What scares everyone this time around is that oil prices could fall to $40 and stay there for at least a year.

In 2009, low oil prices were seem as temporary and Russia's low debt levels reassured investors that it could borrow its way out of trouble if it really had to.

Today, financial sanctions mean that Russia will have to rely entirely on its hard currency reserves and now no-one is expecting oil to return to $100 a barrel next year.

A debate has started on where the "red line" is for a fall in Russia's forex reserves; how far do they have to fall before Russia's financial system goes into meltdown? On paper, Russia should be fine, all other things being equal, until $60bn, or three months’ worth of import cover (and Ukraine's economy is currently defying gravity with half this amount of import cover).

The economist Anders Aslund suggested in a recent blog that Russia's reserves are actually $200bn of "useable money" and so a collapse could come even earlier, but as bne argued in a blog, this is an extreme view.

On December 16, the Association of Institution International Finance said the red line for Russia's hard currency reserves was at $330bn, whereas Charlie Robinson, chief economist at Renaissance Capital, said in a tweet, "We strongly disagree," pointing out that Russia still has $270bn of cash reserves and another $170bn in the two reserve funds, which should be more than adequate to support the ruble.

The CBR's new policy of letting the ruble sink means that the money will last much longer.

Nabiullina has been betting that the oil price will stop falling soon and the price rebound to something like $70, bringing the ruble up with it. But that looks a lot less likely now and last night's rate hike suggests the CBR has caved into a new, much darker economic outlook.

Everything now depends on whether the oil price stabilises and at what level. There has been a lot of speculation that Opec members, and Saudi Arabia in particular, are happy to let oil prices fall in the short term to drive marginal US shale oil producers out of business. But the selloff is causing its own problems.

"Financial investors into oil have stop-loss positions which cause them to sell off their positions whenever the prices falls to certain levels," says one senior Russian fund manager, who has just been negotiating with Arab sovereign wealth funds.

“What we are seeing now is several of these mandatory sell-offs being triggered, each one which drives oil down to the next trigger level.”


Most worryingly, Russia's problems are starting to spread. Ukraine has been in deep trouble all year and it is now teetering on the edge of collapse; its hard currency reserves dipped below $10bn earlier this month, or about 1.3 months’ of import cover. The hryvna is down by some 40% since the start of the year and the only thing holding it up now is the promise of more international bailout money in the new year.

Kazakhstan devalued the tenge in February by 18%, but all the wiggle room it created has now been used up. Fears of another devaluation are mounting fast, as Kazakhstan's economy remains closely tied to Russia's as well as being a major oil exporter.

The falling currencies are no longer just hitting countries that are tied to Russia and the contagion is spreading out, leading some to start talking about a repeat of 1998 when oil prices fell to $10. Last week the Turkish lira sank to its lowest levels against the dollar for a year, despite the fact it is one of the big winners from falling oil prices, as it is heavily dependent on oil and gas imports. Likewise, China, another major energy importer. has watched its currency fall by 26% since May, and 7% since the end of October alone. 

Collapsing currencies around the world, coupled with the "death spiral" of selling in the oil markets, is sparking worries that we are coming to the point where things could spin out of control – and not just for Russia.

MORE: Business