Can anything save Russias rouble?

Woe to Russian consumers who like Swiss watches with their Italian suits

Woe to Russian consumers who like Swiss watches with their Italian suits - or even furry Australian boots with their Chinese disposable fashion. The rouble has lost more than 40 per cent of its value in the past year, including a drop of about 8 per cent so far this week, and the slide shows no signs of slowing. But with President Vladimir Putin offering ideas that are dubious at best, does Moscow even want to stop the rot?

Earlier this year, Russia's central bank took heroic measures to prop up the rouble. It spent US$40 billion (NZ$51.87bn) of its foreign reserves between January and May - about 8 per cent of the total at the time - on its own currency to raise the rouble's price in global markets. Then, though the rouble continued to slip, the central bank was quiet ... for months.

What happened? In all likelihood, the central bank realised that it might need its reserves to strike a decisive blow against an all-out speculative attack by currency traders on the rouble - the kind of attack that crippled the Thai baht in 1998. If the Russian government wanted to defend its currency, it would have to take a new approach. This time, the strategy would rely on Russia's biggest export, crude oil.

Exporters of oil in Russia ultimately turn the dollars they receive into roubles. At lower oil prices, they don't receive as many roubles, and the demand for the currency falls. To stop the exchange rate from dropping, Russia has to export more goods and services. Right now, that means more oil.

At the moment, Russia is probably shipping 5 to 6 million barrels of oil abroad every day. That's as much as one-third more than it exported last year. Its daily oil production is holding at about 10 million barrels, with no cuts in sight; unless domestic consumption were to spike - unlikely with the Russian economy on the verge of recession - those bumper exports will continue.

But will they be enough? At current prices, Russia's exports of crude oil could be worth close to US$140 billion a year. Yet in 2013, when oil prices and the rouble were both much higher, the total came to US$174 billion. Even at booming production levels, the value of Russia's exports in dollars is still down by 20 per cent.
This is why cutting production now, as the Organization of the Petroleum Exporting Countries (OPEC) wanted, would have been so dangerous for Russia. The idea of the cuts was to push oil prices higher in the medium term, but a temporary dip in the value of Russia's exports would have left the rouble exposed.

No, Russia must keep pumping to keep the rouble afloat on a sea of oil. But by doing so, it guarantees that prices will stay low for longer. It's also depleting another kind of reserves - its oil reserves - in the worst possible way by selling more, not less, when prices are low. And it hasn't even solved the problem.

In the meantime, the central bank has returned to the markets to buy roubles, spending as much as US$350 million a day since October. But there's a limit to how far it can go; its reserves of foreign currencies were already down by close to 20 per cent for the year when buying began, reducing the safety net for both currency attacks and credit crises like the one that hit in 1998. Investors are already warning that the country's credit rating may soon be in jeopardy.

With the central bank increasingly hamstrung and oil production already straining its limits, what else can Russia do to bolster the rouble? In his state of the nation speech, Putin suggested a no-questions-asked amnesty for foreign funds returning to Russia. Such a move would bring in some foreign currency but also allow unfettered money laundering and tax evasion - perhaps something his cronies would appreciate. Argentina tried this in 2013, and it didn't stop the peso from crashing earlier this year.
Unfortunately, the composition of Russia's economy leaves few other options. In most countries, a weaker currency can be a self-correcting problem. It makes goods and services cheaper to foreign buyers, stimulating demand. When enough new demand reaches the market, the currency stabilises. But Russia's dependence on oil means it isn't most countries - and oil isn't most exports, either.

Oil prices are set in a global market where Russia's share is probably below 10 per cent. When the rouble loses value, oil prices to foreign buyers don't change. The buyers need the same amount of their own currencies to purchase each barrel, so they have no incentive to consume more. This wouldn't be such a problem, except that more than two-thirds of all Russian exports are in the energy sector.

The same problem affects another mechanism that often works to settle a struggling currency: bargain-hunting. With the rouble at such low levels, investors might have been expected to flood Russia with foreign cash in a rush to grab assets at low prices. But most of the valuable assets in Russia's economy are, once again, in the energy sector - currently unattractive, and often unavailable to foreign buyers, anyway. Even if higher oil and gas prices arrive, this dynamic won't be of much help, either.

Of course, there is one big thing Russia can do to save the rouble: end the crisis in Ukraine. With sanctions lifted, some of the tens of billions in foreign money that left Russia might return, boosting the rouble and the economy at the same time. Yet this option doesn't seem to interest many people in Moscow - at least not many people named Vladimir.
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