By Don Miller
The Russian ruble fell yesterday (Monday) to levels not seen since the 1998 banking crisis, as the nation's central bank devalued the currency for the sixth time in seven days. The devaluation is seen as a sign of further deterioration in the Russian economy and comes despite government efforts to orchestrate an orderly retreat.
A drop in the price of oil, the war in Georgia, and a gas-export dispute with the Ukraine have put a huge dent in the Russian economy, which now teeters on the verge of recession. The devaluations reflect the new reality of low prices and falling demand for oil and other exportable commodities.
In order to contain the damage, the central bank is accelerating the ruble's slide. Policymakers devalued the ruble every trading day last week except for Tuesday (Jan. 13), letting it fall an average 1.7% a day versus a basket of currencies. By comparison, November and December averaged two devaluations a week, according to Bloomberg News data.
In order to cushion the ruble's fall, Russia has spent $245 billion since August, as policymakers sold over a quarter of the country's gold and foreign-currency reserves. That has some economists calling for a free-float or a big devaluation to avoid depleting all of the reserves. Russia's reserves, the world's third largest, stood at $426.5 billion on Jan. 9, according to BNP Paribas SA.
Russia is intervening in the currency markets to prevent sharp swings that move people to withdraw their savings. Prime Minister Vladimir Putin pledged last month to use the nation's foreign-exchange reserves to prevent huge moves and to promote calm in the Russian heartland.
Investors have reacted by pulling back from the currency.
"Fear of another devaluation means nobody wants to buy rubles right now," Lars Rasmussen, an emerging markets analyst in Copenhagen at Danske Bank A/S told Bloomberg News. "The ruble has begun to look more and more overvalued because of the fall in the oil price."
Meanwhile, downward spiraling oil prices continue to exert pressure on the overall economy. Russia's main oil export, Urals crude, has declined 69% to $44.43 a barrel from record highs in July. Analysts estimate the price needs to reach $70 a barrel for the government to balance the budget this year.
The government wants desperately to avoid another run on the central bank, like the one in 1998, when investors fled the market by selling rubles and Russian assets. That crisis forced Russia to spend its foreign reserves to defend the ruble, further eroding investor confidence and undermining the currency. Eventually, the ruble fell 71% against the dollar before finally stabilizing after the government defaulted on $40 billion of debt.
Despite government efforts, there are signs that remembrances of the 1998 crisis are spurring people to sell rubles.
"Of course I have changed my savings into foreign currency. I don't want to lose my wealth," Alexei, a Russian banker, told Reuters outside an exchange point in snowy central Moscow. Others were busy changing money into dollars in anticipation of increasing prices for food and medicine.
Banks and companies are also hoarding foreign currencies, Evgeny Nadorshin, senior economist at, told Bloomberg.
"All the attention of the people is focused on the Forex market," Nadorshin said. "Companies aren't buying supplies, they're investing their rubles in dollars instead because the play is too attractive."
But some analysts believe the devaluations may soon be over. As the cost of money rises, and supply tightens, policymakers may be forced to halt the ruble devaluation. Russia's Moscow Prime rate, the average interest rate banks charge to lend money to each other, rose to a two-month high of 12.5% yesterday, Bloomberg reported.
Mark Mobius, the well-known globetrotting investor and the executive chairman at Templeton Asset Management Ltd., said he expects Russia's currency will begin to stabilize, meaning the central bank may slow devaluations as the ruble approaches fair value.
"It's not as overvalued as it was," said Mobius, who manages more than $24 billion in emerging-market assets. "I know some commentators think further devaluations can be expected, but I'm not too sure about that."
News and Related Story Links:
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