Russia's Ruble Strategy Correctly Takes the Long View

  • Allowing the ruble to fall maintains Russia's investment rating and long-term economic prospects
  • Burning through the reserves to support the ruble would be a brain-dead, short-term populist measure
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This is an excerpt from an article that originally appeared at openDemocracy

Although not saying so publicly, the Kremlin has adopted a deliberate strategy – to let the rouble continue falling and accept the painful economic consequences over the medium term as the “lesser of two evils.”

The weak rouble protects the country’s budget revenues and provides a soft stimulus for domestic manufacturers.

It allows the country to survive the crisis but at the expense of growth and investment flows, both of which are being sacrificed over the medium term in order to try and remain in a relatively better shape to recover after the crisis and also to ensure that any loss of public support for the government is contained.

As the Kremlin sees it, trying to limit the decline in financial reserves in order to protect the budget, and to preserve the investment grade rating, is a better strategy than burning though the money while oil remains weak.

The reserves

President Putin made this clear at his recent press conference. He said he is opposed to the Central Bank (CBR) using any more of the country’s reserves in an effort to defend the currency.

I believe this is the correct strategy given the nature of the current crisis.

Lawmakers in the Duma continue to call for the dismissal of Elvira Nabiullina, the Chairman of the Central Bank, and for greater support for the rouble.

That is a populist short-term measure, which is unsurprising against the backdrop of reports of people having to cancel increasingly unaffordable foreign New Year’s holidays, and the near frenzy of consumers trying to exchange depreciating roubles for almost any expensive goods they can still find.

Russia is right not to use its valuable reserves in this way because that would be a waste and, within six to nine months, the crisis would be a whole lot worse.

So far in 2014 the CBR has burned through almost $90 billion of reserves while the rouble has continued to free fall. By mid-December the currency had lost 84% against the US dollar and 60% against the Euro. Oil is the key driver and so long as the price of a barrel keeps falling then so too will the rouble no matter what the CBR does and how much it spends.

Since 1 October the rouble has fallen 50% while the price of a barrel of Urals crude has dropped 45%.

Trying to preserve the country’s investment grade rating, without which it will be very difficult to attract back foreign investors after this crisis ends, and keeping money in the vault so as to ensure there is no threat of a banking crisis or of a default risk if sanctions remain in place into 2016, is by far the greater priority.

Chris Weafer is the co-founder of Macro Advisory, and former Chief Strategist at Sberbank CIB. He served for four years as Chief Strategist with Uralsib Financial Corporation and for five years with Alfa Bank.

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