Russian currency reserves are running out
Russia’s foreign exchange reserves fell an additional $ 6.4 billion last week as the central bank and the finance ministry continue the battle to support the ruble. At that rate, the country’s remaining $ 368.3 billion will have all but disappeared around the same time next year.
Russia’s reserves fell by more than $ 100 billion, from $ 469.9 billion in June, as collapsing global oil prices caused the Russian currency to fall.
Russia depends on oil and gas revenues for around 10% of GDP and half of federal budget revenues, so when the price drops, the economy does the same.
Morgan Stanley estimates that “every $ 10 drop in the price of oil means a $ 32.4 billion drop in oil and gas exports, which equates to about 1.6% of GDP” and a drop of about $ 19 billion in government budgetary revenue.
To protect the country’s businesses from the collapse in the value of the ruble (the decline in the currency increases the cost of imports and foreign currency debt), the central bank and the finance ministry sell dollars and euros and buy rubles to support up to the price of the latter. While this helped stabilize the currency, the falls have already plunged Russia’s banking sector into crisis and forced the government to cut its budget by 10% this year.
The big question now, however, is why Russia has yet to burn its currency reserves when the price of oil appears to have rebounded from recent lows.
The The Bank of Russia told the Russian press service TASS: “The reduction in international reserves for the week of $ 6.4 billion, or 1.7%, is the result of foreign currency repo transactions and reduced balances of the Russian Ministry of Finance and the Bank of Russia, as well as the negative balance of foreign exchange and market revaluation.
This suggests that the currency remains under pressure and, even at over 62 rubles to the dollar, it may still be above what the market considers its fair value. If the price of oil is to stay structurally low, this is a battle the central bank is unlikely to win and could simply mean throwing money away rather than letting the currency find its own level. .
And that’s a problem. If the falls continue at around $ 6 billion a week, they will be nearly sold out by this time next year. However, at least one key threshold – sufficient reserves to cover at least six months of emergency imports – may already have been exceeded.
Alexei Kudrin, the former Russian finance minister and current chairman of the Civil Initiatives Committee, wrote a blog post in the Kommersant daily last year in which he said available reserves could barely cover six months of imports at current prices:
Six months of Russian imports are worth about half of the current level of international reserves, which are valued at around $ 454 billion. If we subtract the reserves used to support the government budget, the residual value of the reserves only slightly exceeds the amount needed to pay for six months of imports.
Some analysts say that six months is the critical level to insure the Russian population against the possibility of serious hardship in case the crisis worsens and the Russians are deprived of foreign property. (Russia imports a large number of basic products, including butter, cheese and meat.) Although imports are expected to contract by up to 30% in 2015 due to the
but with the level of reserves likely to continue to decline over the next few years, we could even cross a very small total.
The crisis in Russia is not over.