- Rouble's recent strength is becoming a political problem for President Putin
- Russia's central bank has been overzealous in stabilising the country's currency
- Economic uncertainty, not the rouble, is top concern of Russian businesses
Too much of a good thing; the rouble's recent strength is becoming a problem
for President Putin. Photo: iStock
By Nadia Kazakova
The rouble has recently decoupled from oil prices and analysts gave various reasons for the Russian currency's strength, from payments of annual dividends and taxes by exporters (who need to sell FX to cover these liabilities) to the coup in Turkey and switch into Russian assets.
On a two-year historic view, however, the current period of decoupling between oil and the Russian rouble does not look so dramatic. On a relative basis, 1-month Brent futures have been down 18% since the start of 2015, and the rouble has been around 12% weaker against the dollar (as of January 20, 2016).
Relative performance and volatility of rouble and 1-month Brent futures
Source: www.rbc.ru, www.quandl.com
The relative gap between oil prices and the rouble has opened before, but the current episode looks somewhat different. It's not only the divergence between oil and the rouble that is noticable -- the much-reduced volatility in the rouble also catches the eye.
Apart from taxes and dividends, there might be some more fundamental reasons that the Russian currency may have become a bit too stable and, possibly, a bit too strong for the current state of the economy.
Over the last year or so, the central bank of Russia has done all it could (and more) to discourage FX speculation and stabilise the rouble. This makes sense, as the bank was severely criticised for the rouble's wild gyrations in late 2014 and mid-2015.
The central bank has been keeping interest rates high (which must have attracted a fair share of 'hot' money into government bonds), and has been discouraging Russian banks from having too much FX on their balance sheets by increasing reserve requirements for FX assets and liabilities. Regulations on retail FX purchases and on foreign forex brokers' operations in Russia have been tightened as well.
The central bank has also been involved in coordinating FX sales of the Russian exporters, all in the name of keeping the rouble stable.
On top of that, Russian banks have been mostly paying off their FX debts by selling down their FX assets, thus reducing demand for foreign currency. Corporate Russia, too, seems to be doing its best to have FX debts rolled over or refinanced, rather than repaid.
Retail demand for FX might also have waned on restrictions on foreign travel, as popular holiday destinations such as Egypt and Turkey have been closed off and employees of enforcement agencies have been effectively banned from going abroad.
The net result of all these efforts has been a rise in Russia's FX and gold reserves, which President Putin seems to have been paying particular attention to. But it might also have led to strengthening of the rouble and its decoupling from oil, which the Russian president has been less pleased about.
It seems that you can have too much of a good thing.
During his meeting with Russian prime minister Dmitry Medvedev on July 19, Mr. Putin noted that the rouble has been strengthening, despite volatility in commodity markets (i.e. being on the downward trend) and they need to think what to do about it, and when
The Russian president also mentioned the rouble strength in a meeting with Boris Titov, a prominent businessman, the commissioner for entrepreneurial rights and the leader of a pro-business party. The transcript of the short public part of the meeting is available in English from the Kremlin website.
Apart from Putin's comments on the rouble (which were not that prominent), it gives a remarkable insight of how the business and the authorities can speak past each other. Mr. Titov insists that economic uncertainty (i.e. an uncertain investment climate), not the rouble or inflation, is the top concern for businesses. Mr. Putin replies that macroeconomic stability forms the foundation for resolving all other problems.
Low inflation and an induced financial stability, however, might not be a solution for weak institutions (or their absence) and poor investment climate.
The point is that the current situation with the rouble might be partially a result of the very same weak institutional framework and lack of checks and balances in the financial system. The central bank might have been overly rigourous in building up FX reserves and might have over-focused on reducing rouble volatility. Russian banks and exporters have had no choice but to follow new rules, with little regard to their own business interests or the interests of their clients.
Banks have been discouraged from taking short-term FX positions, but this might distort the rouble value, making it less attractive for importers. Companies (the banks' clients) might want to borrow in FX, not in expensive roubles, but have little choice, as the banks are not offering FX loans. Exporters might have preferred to keep FX in a bank deposit rather than being coerced into selling FX at the central bank's informal request. The stable rouble might be the result of all these enforced decisions, but, ultimately, it is not very conducive to investments.
Now, the reduced rouble volatility and, partially as a consequence, the rouble strength is becoming a political problem. The central bank, in turn, might have little choice but to react to Putin's comments. Interest rates might need to go down (and sharply) when the central bank's board of directors meet on July 29.
— Edited by D. Deacon