Rouble seen outdoing ’14 shock without sinking Russia economy
December 25 2015 09:45 PM

An employee counts rouble banknotes at a private shop in Krasnoyarsk. The currency would need to tumble more than 20% to at least 90 against the dollar to tip the country into a
full-blown crisis, according to 17 of 20 respondents in a Bloomberg survey.

New York

The rouble has room to weaken further, even beyond the record-low it set against the dollar a year ago, without inflicting terminal damage on the Russian economy, according to a survey of analysts.
The currency would need to tumble more than 20% to at least 90 against the dollar to tip the country into a full-blown crisis, according to 17 of 20 respondents in a Bloomberg survey. Should such a threat emerge, the Bank of Russia has an array of tools at its disposal, including verbal and market interventions, an emergency interest-rate increase and capital controls, they said.
“It would take more than 90 roubles per dollar to provoke significant repercussions,” said Sergey Narkevich, an analyst at Promsvyazbank in Moscow. “In 2015, Russian monetary authorities managed to mostly avoid spillovers from the foreign- currency market and keep the financial system afloat and broadly functional.”
The world’s biggest energy exporter has been coping with international sanctions and the collapse in oil prices, which set Russia on course for its longest recession in two decades. While the ruble lost about 54% since the start of last year, and a bout of weakness has forced a pause in the central bank’s easing cycle since July, the higher converted revenue from oil and gas sales helped the budget compensate for the drop in commodity prices.
Even so, a weaker currency risks stoking inflation. Based on historical data, Societe Generale estimates that a 10% rouble depreciation adds about 50 basis points to a full percentage point to annual inflation in Russia. Bank of Russia Governor Elvira Nabiullina said this month that the rouble’s impact on price growth is easing.
The rouble, which fell to an all-time low of 80.10 against the dollar last December, has weakened almost 6% this month, the second-worst performer among 24 emerging-market currencies tracked by Bloomberg after the Argentine peso. The correlation between the Russian currency and the price of Brent has been rising in December and was at 0.74 on Wednesday. A reading of 1 would mean the two are trading in lockstep.
With the renewed slide in crude oil menacing the Russian economy, a weaker rouble may be welcome as long as it’s not the result of a sudden collapse, according Per Hammarlund, chief emerging-markets strategist at SEB in Stockholm.
“The level of the rouble is less important than the pace of the drop,” Hammarlund said. “An orderly, gradual depreciation should be welcome for the government as it would boost government oil revenues in roubles.”
The price of Brent in rouble terms fell to the lowest level since November 2010 on Tuesday, making it more difficult for the government to generate enough revenue to fill its biggest budget shortfall in five years.
The central bank has pledged to avoid interventions on the foreign-exchange market unless the rouble’s swings threatened financial stability. While its three-month implied volatility is still the world’s fourth-highest at 18.3 after the currencies of Argentina, Brazil and Colombia, it’s down from this year’s high of almost 90 in January, according to data compiled by Bloomberg.
“The Bank of Russia still has the full arsenal of tools at its disposal in case of the crisis deepening,” said Tatiana Orlova, a senior economist at the Royal Bank of Scotland in London. “Although verbal interventions are the least costly tool to use, none of the other tools that come at a higher cost can be 100% ruled out if the oil prices collapse.”
Currency interventions will be the most likely tool for the Bank of Russia to use as an anti-crisis measure in the coming months, according to 17 of 23 economists in the Bloomberg survey. Sixteen see a verbal intervention as a likely move, while the same number of respondents said an emergency rate increase can be used. Eleven said capital controls may be possible.
While President Vladimir Putin had signed into law a budget based on an average oil price of $50 a barrel and the deficit at 3% next year, Finance Minister Anton Siluanov said December 16 that his ministry was preparing different scenarios for next year. Putin said during his annual news conference last week that assuming the oil price at $50 for 2016 is “very optimistic.”
The economy will contract 0.5% in 2016 from a year before, according to the median estimate of 39 economists in a separate survey, which is down form zero growth expected by the respondents last month. A renewed sell-off in oil in recent weeks pushed banks including JPMorgan Chase & Co to worsen their forecast for the Russian economy.
“Significant currency weakness is plausible if oil stays below $40 a barrel in the mid-term,” said Oleg Kouzmin, an economist at Renaissance Capital in Moscow. Even so, “we doubt that potential rouble weakness in these scenarios would put Russian financial stability under threat.”

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