Russia devalues currency again as foreign reserves plummet

Russia is one country that we do not want to see fall on hard times. It has great geo-strategic power, but a weak economy, declining oil output and revenues and increasingly autocratic rule? Now it is being roiled by the global financial crisis as hot money is fleeing the country causing its currency to plummet and its stock market to swoon. Russia has used up a quarter of its massive foreign currency reserves to stabilize the situation — to no avail. Is Russia about to become a problem?

Russia’s central bank devalued the ruble for the second time in a week after policy makers spent $161 billion of reserves trying to defend the currency and oil revenue slumped.

The ruble fell as much as 1.3 percent to a four-year low of 37.5015 per euro after Bank Rossii widened the trading band against a basket of dollars and euros, the mechanism by which it manages the exchange rate.

Russia has drained 27 percent of its reserves, the world’s third-largest, trying to stem a 16 percent decline in the currency since August as the price of oil fell 69 percent, constricting economic growth. Standard & Poor’s cut its credit rating on Russia for the first time in nine years last week.

“It is possible we will see two to three more devaluations this week,” said Martin Blum, head of emerging-market currencies and fixed income strategy at UniCredit SpA in Vienna. “Russian policy makers are serious about continuing the one percent devaluations.”

Bank Rossii allowed the ruble to fall against a target exchange rate by 8.6 percent, from 7.7 percent last week and 3.7 percent a month ago. A spokesman confirmed the band was widened, declining to be identified because of bank policy.

The ruble dropped for the ninth time in ten days to 37.4384 per euro by 11:33 a.m. in Moscow, from 37.0146 on Dec. 12. Against the dollar, the currency fell 0.6 percent to 27.8384. Those movements left the ruble at 32.1631 versus the central bank’s basket, which is made up of about 55 percent dollars and the rest euros.

The currency has fallen 5.9 percent against the basket in six increases of the trading band since Nov. 11.

Bank Deposits

A one-time, 20 percent devaluation is needed, according to Moscow brokerage Troika Dialog. Goldman Sachs Group Inc. forecasts a decline of as much as 25 percent versus the basket.

Prime Minister Vladimir Putin’s pledge to avoid a “sharp” devaluation of the ruble and let the currency fall gradually has dissuaded citizens from storming banks to remove deposits as they did in 1998, when many lost life savings as the ruble plunged 71 percent versus the dollar and the government defaulted on $40 billion of debt.

Russians withdrew 6 percent from bank accounts in October, the most since Bank Rossii started collecting the data two years ago. Deposits in foreign currency, meanwhile, rose 11 percent.

When the credit crisis went into high gear in September, Russia became unfavored very quickly. The country was deemed too risky. The result has been a withdrawal of international funds. Russia has done its best to fight the trends, but it has been a losing battle. Combine the economic woes with an aggressive foreign policy and it looks like you have a problem.

This is certainly the view held by many in Washington. Much of Russia ills started as a result of the aggressive moves it took in Georgia this summer. Many had already began to view Russia as a poor place to invest money as a result of Vladimir Putin’s centralization of power, the effective nationalization of many oil projects and widespread corruption. But, the Georgia attack confirmed the worst fears for many.

As global recession takes hold, I would expect the situation in Russia to worsen. The question is what will be the political response inside Russia and what will be the foreign political response afterward.

Source
Russia Devalues 2nd Time in Week, Lets Ruble Fall Total 8.7% – Bloomberg

Related article
Putin Faces Rising Social Discontent as Russia Enters Recession – Bloomberg

8 Comments
  1. Denis says

    Your statement that Russia’s war with Georgia has undermined investor confidence in Russia implies that investors care about this sort of thing. If this were true then America’s war with Iraq should have completely obliterated confidence in the USA. It did not happened and therefore I conclude that investors have absolutely no qualms about investing in aggressive regimes. In other words, your statement is demonstratably wrong.

    I am interested to hear what basis did you use to come to this conclusion.

  2. Edward Harrison says

    @Denis,
    I would say that my claims are not demonstrably wrong. They are based on real, known activity amongst actors in the investor community. People are actually reducing exposure to Russia. You could say that this is because of the expropriation and the illiquidity risk. In the late 1990s, I worked briefly on the emerging markets trading desk around the time that Russia devalued. There were all manner of currency controls then and that created a lot of panic. Later, foreign oil companies saw their investments expropriated as oil prices rose and were irate about this. By the time Georgia happened, the appetite for risk globally was such that people just saw this as a seminal moment and started to withdraw money.

    Here is a publicly available link to news of this at the time:
    Russia investors flee after conflict – Telegraph

  3. Denis says

    The flight of investors from Russia (as demonstrated by depletion of reserves) can have several explanations that logically make sense:
    1. Deteriorating feedom of the press (as demonstrated by both deaths of journalists and general clamp down on media) can impact investors awareness.
    2. Deterioration of property rights is an obvious concern (I remember examples and can dig them up).
    3. Increased government control in conjunction with corruption is also an obvious concern.

    I see no reason why a short-lived, inexpensive (in terms of budgetary strain) victorous military conflict at the peripheral would deter investors in the rest of the country. You have provided no logical explanation so far, and no proof. The onus is on you to provide the explanation or proof (or both) of this actually happening.

    So far you have only made one claim in your original post: “Much of Russia ills started as a result of the aggressive moves it took in Georgia this summer. … But, the Georgia attack confirmed the worst fears for many.” and followed up with an anecodote about investors being spooked about factors OTHER than the military conflict, thus side-stepping the point I raised. There is still no basis in your claim that the conflict had any bearing on the investor confidence.

    On my side I have provided a counter-example where a protracted, very expensive (budgetary) conflict did not lead investors to question investment climat in the USA, at least not to the extent of it showing up in the press.

    To move this discussion forward you could supply a logical explanation of why would investors care about Russia’s military conflicts while not caring about military conflicts of other countreis. You could also supply a few anecdotes from your network of investors or traders actually being spooked by the conflict (instead of all the other reasons).

    1. Edward Harrison says

      @Denis, I’m sorry but the onus is not on me. You can accept or reject my thesis. I called attention to the fact that many had concerns about Russia prior to the Georgia incident for many of the reasons you highlighted. However, these concerns did not cause them to flee Russia en masse.

      There fears crystallized when the Georgia invasion happened. I believe the link I sent you was wrong. Here is the article I am referring to in the prior link that says exactly what I am saying:

      http://www.telegraph.co.uk/finance/markets/2795184/Russia-investors-flee-after-conflict.html

      “Investors have pulled funds out of Russia at the fastest rate since the country’s 1998 debt crisis, in the wake of the conflict with Georgia, official figures have shown.

      Official figures from the Central Bank of Russia showed yesterday that the country’s foreign exchange reserves fell by $16.4bn in the week to August 15.

      It is the biggest fall since comparable figures began in 1998, though it is thought to be smaller than the withdrawals made by foreign investors in the wake of the Rouble crisis earlier in the late 1990s.”

      This is also confirmed by my own independent sources as well.

  4. Denis says

    The fact that Russian stock market got hammered at the same time does not prove causation. US stock market was on decline for over a year before it collapsed and this decline took place during same time period so the Russian stock market could have gone down for the reasons of concerns for the world economy, if on a slightly dfferent schedule.

    You mentioned several times that investors’ fears have been crystallized by the conflict. Can you point to a few such investors? Not journalists or bloggers and their generalizations, but actual investors?

  5. Edward Harrison says

    Denis, it does not prove causation. As I said, you can believe my thesis or not. As for who these fleeing investors are, they don’t want to be named. Newspapers never reveal their sources but I suspect no one would talk to them about that. I have gotten many calls from reporters asking me to name names and that’s a no-no, because these people have positions they are trying to maintain and they don’t want the publicity.

    Again, it does not prove causation. But it is a moot point. What matters is that Russian is losing reserves and their currency is falling.

  6. Denis says

    Ok, so you can’t back your point with any verifiable data and you didn’t provide any statistical or demo-graphical information about your investors. Even if one were to take your personal trustworthiness for granted, how is a reader supposed to know whether what you are relaying is indicative of a trend or merely a single anecdote? How do we know you have not fallen for confirmation bias? You presenting this as a fact rather an unverifiable anecdote (“Much of Russia ills started as a result of the aggressive moves it took in Georgia this summer. “) and directly implying causation does very little to help.

    The reason I keep haggling you is that I’m used to your blog being of generally higher quality. Well, anyway, I’ll quit now.

    Can you ask those anonymous investors why US aggression against Iraq did not scare them, but Russia’s aggression against Georgia did? I want to understand the mindset. Thanks.

    1. Edward Harrison says

      @Denis, I understand fully. You feel my claim lacks verification. My comments were based on multiple trading sources and based on the available data about currencies and sticks and on news reports.

      But, getting to the data aspect, Russia’s markets began to sell off heavily after the Georgia invasion and the central bank started having to buy rubles as many people sold. This would suggest a loss of confidence in Russia.

      However, The Lehman scandal was soon upon us and I would agree with you that it would be hard to identify the Georgia invasion, therefore, as a unique trigger point for the selling of rubles and the subsequent depreciation and sell-off in Russian markets, especially when Russia’s main export, oil, has traded down $100.

      What about US aggression in Iraq, why has that not caused the U.S. to sell of or caused the Chinese to stop buying treasuries? I don’t know. There is a bias there of course.

      Please read my thoughts and Marshall’s thoughts on the Georgia invasion from the time. I found the reporting quite anti-Russia in a knee jerk kind of way. It was a bit surprising to me as to how much so. Apparently Cold War feelings still linger:

      https://pro.creditwritedowns.com/2008/08/russia-vs-georgia-exposing-us-foreign.html
      https://pro.creditwritedowns.com/2008/08/us-response-to-georgia-is-missile.html
      https://pro.creditwritedowns.com/2008/08/gorbachev-gives-lie-to-western-claims.html
      https://pro.creditwritedowns.com/2008/08/question-of-day-12-aug-2008-would-we-go.html
      https://pro.creditwritedowns.com/2008/08/are-nato-expansion-plans-smart.html
      https://pro.creditwritedowns.com/2008/08/mccain-and-his-anti-russia-rhetoric.html

      Denis, what is your feeling about Russia, Georgia, the Western Media and traders? I’d be curious to know.

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