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?

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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.

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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.

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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

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