Russia: Ruble suffers another major hit in January in tandem with oil plunge
February 3, 2016
The Russian ruble is making the headlines once again at the beginning of 2016 following its roller coaster ride in 2015. The ruble closed 2015 at 72.9 RUB per USD—a 30% loss in value compared to the end of 2014. At the beginning of 2016, the ruble saw another episode of strong volatility and, on 21 January, the Russian currency fell to a new record-low of 82.4 RUB per USD, causing a brief panic that nearly triggered a bank run.
Global oil prices tumbling to the lowest level in over a decade at the beginning of the year piled more pressure onto the ruble and fueled further concerns of a deeper-than-expected recession in 2016. Moreover, the Russian currency’s sharp fall has placed the Russian Central Bank’s (Bank Rossii) exchange rate policy under scrutiny again as the ruble’s fresh plunge is likely to spur inflation in the coming months, thus undermining the Bank’s efforts to reduce it.
Since the Russian Central Bank announced a shift to a free-floating exchange rate regime in the second half of 2014, the value of the Russian ruble has been closely correlated to oil prices. Bank Rossii’s decision to allow the ruble to depreciate in line with lower oil prices was the correct response as it allowed the Bank to protect foreign currency reserves and to maintain a current account surplus. The weak ruble has also improved competitiveness in the mining and oil sectors, allowing them to continue to maintain their profitability despite lower commodities prices, and it has cushioned the impact of lower oil prices on the federal budget.
Nonetheless, the ongoing weakness of the Russian ruble presents a number of challenges. A weak ruble is likely to fuel inflation in the coming months despite weak domestic demand. Although inflation moderated in the past months, it remains fairly high and upward pressures coming from a weaker exchange rate will prevent Russian monetary authorities from easing the monetary policy further, thus choking the economy even more severely. Bank Rossii has left the main monetary policy rate unchanged at 11.00% since August of last year and, in its January meeting, the Bank pointed out that upside risks to the inflation outlook could prompt the Central Bank to reconsider a tightening of its monetary policy. Moreover, the depreciation of the ruble continues to pose a big risk to financial stability, as it increases banks’ liabilities denominated in foreign currency, which increases the chances that banks may fail to meet these obligations. Over the course of 2015, Russia’s banking sector remained under significant pressure as the deepening of the recession and high interest rates led to a decline in asset quality and a downfall in lending.
The Consensus view of analysts is that oil prices bottomed out in the first quarter of this year and forecasters expect a gradual, albeit slow, recovery in prices in the following months. However, the risk of persistent low oil prices is high and this will further cloud the outlook for the Russian economy. As the Central Bank stated in its latest meeting, if oil prices remain low for a prolonged period of time, the economy will have to undergo a heavy adjustment to the new conditions. Regarding such an adjustment, Artem Arkhipov, Head of Macroeconomic Analysis and Research Russia, at UniCredit, stated:
“This year’s adjustment will be smaller than in 2015, but still sizable, with a significant adverse impact on demand and growth. With exports facing significant supply-side constraints in the near term, the brunt of the adjustment will once again be on domestic demand. […]. The required adjustment in domestic demand would amount to more than 4% of GDP relative to our December forecast. […]. The rest of the adjustment in domestic demand is likely to come from the further erosion of real incomes.”
Author: Ricardo Aceves, Senior Economist