The Ukrainian crisis, the ruble and the Russian economy
The Russian ruble has fallen to an all-time high against the US dollar as the Ukraine crisis reignites Cold War-type tensions. Here are four things to know about the fall of the ruble, and where things might go from here.
How much has the Russian ruble fallen in recent days?
The Russian ruble fell to a record low of less than 36.4 per dollar and less than 50 per euro for the first time on March 3.
Lars Christensen, head of emerging market analysis at Danske Bank in Copenhagen, explains that one of the main reasons for the fall is that foreign investors’ perceptions of Russia are changing as the Ukraine crisis worsens.
“Investors fear that Russia is moving away from the West. Whether or not this is called a new cold war is controversial, but at least investor sentiment is being swayed by the fact that we are seeing a cooling of relationships. between East and West. And obviously, in such an environment, you would see less foreign direct investment in Russia, ”Christensen said.
It is impossible to say to what extent the fall of the ruble is directly due to the Ukrainian crisis. The currency has already lost 10% of its value since the start of the year due to declining interest from foreign investors in emerging markets in general.
Igor Nikolayev, director of the Russian Institute for Strategic Analysis FBK, a private auditing firm, said: “Regardless of the possible sanctions and this incredible escalation of the conflict, the ruble was already falling and weakening. . Current events only act as a catalyst. accelerate the weakening of the ruble. “
However, the sharp drop on March 3 was enough to get the Russian Central Bank to react. Russian forex traders claim the central bank sold up to $ 10 billion to stem the ruble’s fall. The report has not yet been confirmed by the Central Bank, which only makes its interventions public after two days of delay.
How far should the ruble fall further?
For the moment, the question is impossible to answer. One of the reasons is that the central bank never specified when it would systematically defend the currency.
When the ruble began to tumble at the start of the year, it was widely seen as overvalued against hard foreign currencies. The Central Bank has repeatedly established trading ranges for the ruble, only to then move them again in a weaker direction, as it allows the ruble to find its own level during a controlled decline.
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But the pressure of the Ukrainian crisis could make it even more difficult for Russia to decide where to stop the fall of the ruble.
Christensen notes that the more the ruble falls, the more expensive it becomes for the central bank to protect it.
“We saw in 2008, about the Georgian conflict and the financial crisis, that the ruble was under great pressure and that when the then Russian Central Bank intervened massively and spent 200 billion dollars to defend ruble and failed that it had very significant costs for the Russian economy in terms of high interest rates and significantly lower growth, ”Christensen said.
“So I think the Russian Central Bank is aware of these risks and therefore is likely to allow the ruble to further depreciate, but will step in from time to time and try to curb this sell off. “
Besides the pressure on the ruble, in what other ways is the crisis in Ukraine affecting the Russian economy?
On March 3, the Central Bank of Russia raised its key rate for the first time since August 2012. The increase from 5.5% to 7% is intended to hedge against inflation and prevent a larger liquidation of rubles which would weigh more heavily on the Russian treasury.
At the same time, Russian stocks fell sharply on March 3, with the RTS dollar-denominated stock index falling 14%. Exporting companies have been particularly affected. The value of shares in Russian gas giant Gazprom has reportedly fallen by more than 10% over fears that its lucrative sales to Ukraine will be halted or curtailed.
Where do things go from here?
If the crisis is resolved quickly, the damage will be limited and Russia can return to the much needed business of solving its own economic problems.
Nikolayev says that without solving these deep structural problems, the ruble will continue to devalue. “The fundamental reason [for the ruble’s weakness] is Russia’s macroeconomic weakness. And this weakness will not only persist, it will increase. We have already gone from stagnation to recession, ”says Nikolayev.
But if the Ukraine crisis is not resolved, far more serious economic problems for Russia – and for the West – could arise. As Moscow maintains a threatening posture towards Ukraine and the West responds with warnings of possible sanctions, the exchanges sound more and more like echoes of the Cold War.
And any real pullback to the Cold War risks weakening the infrastructure of trade agreements that today underpins much of the global economy. “If we were to switch to a new Cold War-style scenario, then we would see more fundamental negative impacts that would mean higher defense spending, a less open world economy and trade barriers between East and West,” Christensen said. .
“I think we often forget how beneficial the end of the Cold War was to the global economy and it would be terrible from a global economic perspective to see us move in the other direction.”