The Russian central bank building in Moscow. Pressure is growing on the apex bank of the country to adopt more radical measures to defend the tumbling rouble.
Reuters/Moscow
Pressure is growing on Russia’s central bank to adopt more radical measures to defend the tumbling rouble, such as interest rate rises, but there is no easy fix.
The bank’s board meets on October 31 to discuss monetary policy and there is growing speculation it may soon raise rates to support the rouble, which is being hit by plunging oil prices and Western sanctions imposed over the Ukraine crisis.
The bank says it is also weighing other measures, including long-term dollar loans to banks, as it tries to restore calm to markets.
The rouble has lost more than 16% of its value against the dollar over the last three months, and the central bank has spent over $15bn of its foreign reserves to defend it.
While there is little sign that the fall is causing public panic, the central bank’s goal of reducing inflation to 4.5% next year – from around 8% at present – means it cannot ignore the rouble’s slump, which is pushing up import prices.
And if the currency’s decline gains momentum as some predict, it could yet cause wider financial instability such as runs on bank deposits.
“There’s a real danger that this becomes a self-fulfilling currency crisis if we’re not careful,” said Neil Shearing, chief emerging market economist at Capital Economics in London.
With the Russian economy teetering on the verge of recession, the central bank will be reluctant to raise interest rates.
However, the bank’s deputy chairman said on Wednesday that the bank would have to “seriously” think about rate increases if the current situation continues - something the IMF has urged Russia to do to anchor inflation expectations.
“At the moment they are not winning the battle. They need to do it the old fashioned way, that is increase rates by 150-200 basis points,” said Michel Danechi, portfolio manager at EI Sturdza Strategic Emerging Europe Fund.
Any decision to raise rates would not be taken lightly.
The bank has already increased its benchmark rate three times this year, by a cumulative 250 basis points to 8%, and there are doubts about how effective even higher interest rates would be in encouraging investors to hold roubles. Sceptics said foreign inflows have largely been deterred by Western sanctions, while many Russian outflows are linked to debts that must be repaid in any case.
Russian companies have around $140bn in foreign debt repayments by the end of 2015, a major factor behind the rouble’s weakness.
Other analysts urge the bank to bring forward floating the rouble, planned for the end of this year, to provide more flexible options to manage the exchange rate.
So far the central bank has been sticking to its existing framework, under which it keeps the rouble inside a floating band against a dollar-euro basket, intervening when it reaches the edge of a nine-rouble-wide corridor.
The result has been to slow the rouble’s fall – at the cost so far this month of around $15bn in forex reserves – while doing nothing to stop the underlying selling pressure.
It may actually be making matters worse, as the predictable nature of the bank’s moves is encouraging one-way bets against the rouble.
“The central bank is defending the exchange rate while giving everyone the opportunity to get into the trade (against the rouble). This is creating additional speculative pressure,” said Alexey Pogorelov, Russia economist at Credit Suisse.
A more effective policy, critics say, would be to scrap the corridor but make periodic interventions. That way, the bank could punish speculators by springing occasional surprises.
But not everyone agrees that floating the rouble ahead of schedule would make matters better - especially as the immediate consequence could be a further large fall.
“What the central bank is trying to avoid is a very abrupt adjustment in the rouble,” said Shearing. “History would suggest that (a floating currency) plunges much further than it otherwise would have done – it overshoots in other words.” Ultimately, neither higher interest rates nor a more flexible intervention policy can address the underlying problems that are battering both the rouble and the Russian economy.
The root problem is a hole in the balance of payments, caused by the double whammy of falling oil prices and a freeze on foreign investment linked to Western sanctions.
Estimates of the size of this hole vary, depending on forecasts for oil prices, the rouble, the easing of sanctions, and Russian companies’ ability to boost sales.
Pogorelov at Credit Suisse predicts a $30bn gap between Russia’s forex earnings and outflows in 2015. Shearing from Capital Economics sees a $130-140bn shortfall over the next 12 months.
Whatever the true figure, many analysts expect the central bank will have to keep dipping heavily into its $440bn in reserves even after the rouble is allowed to float.
A recent scheme to provide up to $50bn to banks through repo loans is seen as a step in the right direction. Yet it has done little to calm markets.
One problem is that the instruments on offer, with maturities of seven or 28 days, do not address the need for long-term finance.
The central bank has said that it is considering much longer-term measures requested by banks, including repo loans of up to three years.
But while its forex reserves are ample enough, the bank appears reluctant to use them to bail out banks, which would raise questions about how safely they are being invested.
“The risk is that the (borrowing) bank won’t be able to redeem – this is potential pressure on the central bank reserves,” said Natalia Orlova, chief economist at Alfa Bank.
