The Russian Ruble silentful fall by Gérard Vespierre

(Crédits : Valérie Semensatis)
(Crédits : Valérie Semensatis)

Russia occupies the news political first pages, Navalny case, Belarusian situation, resurgence of Covid-19, barely in the economic field, and never in the monetary domain. However, the Russain Ruble has weakened for years, losing 50% of its  value. This summer, it did not recover with oil price, but on the contrary. By Gérard Vespierre (*) Founder and Chairman of Strategic Conseil (France).

Unlike the USSR, economically isolated, Russia is part of the global economy. The surge of oil price from $ 18, in 1999, to $ 108 in mid 2014, ie, 6 times higher, gave Vladimir Putin and his country 15 glorious years.

Russia increased its crude oil production by over 60%, in the same 15 years. In total, its oil revenues have then been multiplied by 10 ….!

Much more revenues, means much more imports. The Ruble Exchange Rate, and monetary policy became new elements in the Russian economy policies.

The first signs of a feverished Ruble surfaced in 2013, as shown in the graph below ;

The first tensions on the Ruble

Contrary to what has been said and written, the impact of the US shale oil pricing was not the cause of the Rusian Ruble initial downward movement.

The first downturn came with tensions between Russia and Ukraine, before the events at Maidan Square. At the end of May 2013, the Russian president spoke in very blunt terms about Ukrainian plans to come closer to the European Union : “ If Ukraine is to sign a protocol with the European Union, this would inevitably bear (for Ukraine ) serious consequences ” ……    

By the fall of 2013, the Ruble had lost 10% to the Euro.

The 2014-2016 oil price impact

The collapse of oil price, which fell under the $ 30 mark, in January 2016, caused the Ruble to fall by an additional 30% compared to the 2011-2012 period. 

The first replica from Moscow came with the control of capital outflows, and then the sharp rise in Central Bank interest rate. At the beginning of 2015, this rate rose to 17%. It did not come back below the 10% mark until the beginning of 2017 …..

This high rate strategy  fulfilled its monetary objective, ie, the stabilization of the exchange rate, over the period 2015-2018.

Its stability was reinforced by the rise of oil price, steadily above  $ 70 for the full 2018 year.

Over this 2014-2018 period, the drop in oil prices and hence oil revenues, cost the Ruble a third of its value 

Then came the impact of Covid-19, with the drop of worldwide oil consumption by more than 15%.

The Covid – 19 shock

Faced with the drop in China oil consumption, Russia decides not to reduce its production. This strategic change vis-à-vis the OPEC (after the 2018 alliance) sparked an oil volume war with Saudi Arabia. A dramatic fall in oil price resulted. This had a direct impact  on the Ruble exchange rate from March 2020.

In April, Russia made a new change in its oil production strategy, reducing its ouput, and returning to an alliance with the OPEC. This sent a positive signal to the market, limitating the oil price decline and the weakening of the Ruble.

Despite the oil barrel price, sinking below the $ 29 2015 floor, the Ruble hold its parity against the Euro, and despite the latter 6% slight revaluation to the dollar, since Jan 1st.

But a new variable was to come into play : the monetary policy of the Russian Central Bank.

The intervention of the Central Bank

Russia therefore simultaneously faced a 10% drop in production and a drop in price. The 2019 average oil price was $ 65. Considering the average for 2020 to be around $ 40, this is a price drop close to ….. 40% …. Consequently, Russian oil revenues are facing a 50% decrease.

Cumulated with the Covid-19 impact on the rest of the Russian economy, Moscow had to make macroeconomics decisions.

Since the 17% record level of 2015, Moscow had managed a steady decrease of the Central Bank rate. One year ago, it was still at 7.25%. In the last quarter of 2019, decisions were made to continue its decrease, down to 6.25%

The extent of the 2020 economic crisis prompted the decisions to further reduce it by 25, then 50, and finally 100 basis points, by two-months stage.

This policy is encouraging investments, but is exposing the currency exchange rate. The Ruble therefore started to fall again this summer from August till today, despite a relative stability on the oil price front.

Sometimes, difficulties are cumulative.

Geopolitical tensions

Moscow is now grappling with the Belarusian crisis, which again leads to tensions with all Western countries. Then came the poisoning of the N °1 opponent, Alexeï Navalny.

This cumulation of tensions, is even involving the Russian-German gas project, Nord Stream- 2. This leads the financial market to raise the « Russian Risk » index, and turned it into a « rate of depreciation » onto the Russian Ruble.

A few days ago the Ruble exchange rate broke its historical level and came close to 94 Rubles to the Euro.

The consequences of this situation

The consequences are both, economic and political.

From an economic standpoint, the Ruble new significant fall (5% over the last 2 months) will lead to imported products price increase, and therefore will feed inflation.

The (real) 2020 inflation rate will be above government estimate (3.7%) and should exceed 4%, which is very close to the central bank rate (4.25%). Several options are then available.

The Russian government may choose to leave the central rate unchanged, but that would feed inflation, and therefore the decline of consumer real purchase power. This would inevitably generate economic discontent to be translated into a political one.

The other alternative is to increase the Central Bank rate to maintain the currency exchange rate, and slow inflation but, doing so, this would slow the economy, and result in increased unemployment. Popular discontent would surface as well.

Economic and political perspectives, short and medium terms look grim and difficult with complex choices , between two bad solutions. 

Improvments will come from a worldwide increase in oil consumption, linked to a significant resumption of worldwide air traffic. But this will not happen now, and when, it will be slow.

At the end of this decade, the world oil consumption will very probably come to a plateau, and then decline. Prices will also be down, facing excess supply.

These will be new and significant challenges for the Russian economy, and its government.

Before the Ukrainian crisis, 7 years ago, the exchange rate was around 40 Rubles to the Euro.

In 7 years, the Russian Ruble has lost more than 55% of its value.

There is no doubt that the Russian Ruble will continue to face significant new tensions. Will this be, still silentful ?

(*) graduate from ISC Paris, Master in Business Administration and DEA Finances, Paris Dauphine.
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