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Russia: Russia vows not to use unconventional tools to stimulate the economy; currency slides to new record low

October 7, 2014

Russian authorities stated in recent days that the country would not use extraordinary measures to counter the negative effects of the economic sanctions the West has imposed in the wake of the military conflict in Ukraine. On 2 October, President Vladimir Putin joined the head of the Central Bank of Russia, Elvira Nabiullina, in ruling out the possibility of implementing capital controls in an attempt to curb hemorrhaging capital outflows. In addition, Putin claimed that Russia would remain an “open market economy”.

Economic sanctions have taken a serious toll on Russia’s economy. The net capital outflows in the first half of the year amounted to USD 74.6 billion, which represented a sharp deterioration compared to USD 33.7 billion recorded in the same period of 2013. As a result of the continuous capital flight and persistent geopolitical tensions, by early October the ruble had weakened to a new record low and had breached the level at which the Central Bank steps in to support the currency. On 3 October, the ruble traded at 39.9 RUB per USD, which was 8.5% weaker compared to the same day last month. On an annual basis, the currency lost 24.3% of its value against the greenback.

In order to stem the loss in the value of the currency, the Central Bank intervened in the currency market and sold USD 980 million on 3 October. On 6 October, the Bank also moved the floating operational band—the range of the bi-currency basket adjusted to the amount of currency interventions. The lower boundary now sits at RUB 35.60 against the Bank’s basket of dollars and euros (previously: RUB 35.50), while the upper boundary is now at RUB 44.60 (previously: USD 44.50). This suggests that the Central Bank sold at least an additional USD 700 million. According to the Bank’s policy, a movement of 5 kopeks in the trading band corresponds an intervention of USD 350 million in the foreign exchange market. FocusEconomics Consensus Forecast panelists expect the ruble to trade at 37.2 RUB per USD at the end of 2014, and see the currency weakening slightly to 38.3 RUB per USD by the end of 2015.

On 30 September, the government sent the draft budget for the 2015-2017 period to the Duma. Although the budget assumes a fiscal deficit of 0.6% of GDP for 2015, which contrasts the 0.4% of GDP surplus expected for this year, the macroeconomic assumptions seem too optimistic. The government expects the economy to expand 1.2% in 2015 and 2.3% in 2016. FocusEconomics panelists, however, are less upbeat and expect GDP to expand 0.7% in 2015 and 1.7% in 2016. Moreover, the budget assumes that Russia's Ural crude oil will trade at USD 100 per barrel in 2015, which is well above the current price of around USD 90 per barrel. If oil prices remain low due to ample global supply and weak demand from China, this will put additional pressure on the country’s budget.

Some analysts have suggested that Russia could tap into its Reserve Fund for the first time since 2008 in an attempt to shore up the economy. According to the 2015-2017 budget that the Duma received, the government is allowed to use up to USD 12.7 billion (RUB 500 billion) from the USD 91.72 billion Reserve Fund. Finance Minister Anton Siluanov, however, dismissed this possibility on 2 October, although he did state that the government still retains the right to utilize the fund.

While Russian authorities showed their commitment to refrain from imposing capital controls and tapping into its Reserve Fund, further capital outflows, current low oil prices, and a sharper economic slowdown are likely to prompt the government to resort to extraordinary measures to stabilize the economy.


Author:, Senior Economist

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