Five months ago, the Russian central bank needed a middle-of-the-night interest rate hike just to keep the battered ruble from collapsing on international currency markets as the Russian economy faced Western sanctions, a falling credit rating, capital flight and collapsing prices for its prime exports, oil and natural gas.
Five months later, the ruble is one of the surprise star performers of 2015’s currency markets, rising to its highest point against the dollar since 2013, and forcing the central bank in recent days to take steps to try to keep it from appreciating in value too fast. Having briefly touched 79 rubles to the dollar in mid-December, the Russian currency is now trading at just over 49 rubles to the dollar.
According to an index compiled by JPMorgan, the ruble is the best-performing currency among emerging markets around the world so far in 2015. The Russian stock market, which also plummeted in 2014, is up 25 percent so far this year.
Whether that’s a good or bad thing in the long run for the government of President Vladimir Putin, which is still facing an economy in recession and major hurdles in the international market, remains a question mark. But the “worst-case scenario,” in the recent words of first Deputy Prime Minister Igor Shuvalov, “has failed to materialize.”
The ruble’s rebound has been a source of national pride, but it also comes with some double-edged effects. Inflation has been tamed, but Russian exports are now more expensive, and domestic producers face tougher competition from foreign imported goods.
This bodes very poorly for Moscow, which is currently experiencing its widest budget deficit in five years due to public sector wage disputes and increased military costs following the country’s annexation of the Ukrainian territory of Crimea. Russia currently spends a fifth of its federal budget on the military. When the dollar the government receives for petroleum exports buys fewer rubles, Mr. Putin’s government is less able to pay its bills.
Still, the ruble’s turnaround has been nothing short of remarkable.
Last week, Moscow’s central bank announced that it would start buying U.S. dollars for the first time in months to keep the ruble from rising too fast. The move was seen by experts as an attempt to slow the rally despite claims that it was to replenish foreign currency reserves, which stood at $385 billion just last week.
“The level of the ruble is much more important than the level of reserves, which are high by any standards,” Vladimir Osakovskiy, chief economist for Russia at Bank of America in Moscow, said of the announcement. “It was an important sign that the central bank is concerned about the ruble and doesn’t want it to be below [50 rubles] against the dollar.”
Still, Mr. Putin may claim some bragging rights. As global oil prices stabilize and even rise, the ruble has outperformed the currencies of Russia’s oil-producing rivals, such as the Canadian dollar and the Norwegian krone, as well as every other emerging market currency in the past quarter.
Sergey Aleksashenko, a former deputy chairman of the Central Bank of Russia and now a nonresident senior fellow at the Brookings Institution, said in a blog post Monday that the ruble’s December collapse reflected a “perfect storm” of negative factors, but the larger economy has weathered the rough patch well. The agricultural harvest was strong, manufacturing rose in part with greater defense spending, and even oil exports held up.
“The effects of the December storm appeared short-term and more concentrated in the financial sector,” Mr. Aleksashenko wrote. “The real sector of the Russian economy seemed to be relatively stable.”
In addition, Russia has been able to find new partners as Western markets have been shut off due to the Ukrainian sanctions.
Mr. Putin recently signed several agreements with Chinese President Xi Jinping meant to strengthen trade between the two countries, increasing Sino-Russian financial cooperation.
The Russian Finance Ministry on Tuesday announced it was joining the central bank in the bid to keep the ruble from rising too fast. Mr. Putin’s government has cut interest rates three times since the beginning of the year in an unsuccessful effort to halt the ruble’s rise, and last week began daily purchases of foreign currency for the first time since June to replenish reserves, according to Bloomberg Business News.
“From the point of view of managing our own spending, we clearly consider the ruble to be very strong,” Deputy Finance Minister Alexey Moiseev said in a Moscow press briefing Tuesday, according to Bloomberg. “That’s why we are trying to plan the purchases in advance.”
Many contend that the recent ruble rise also helped to soften an impending recession, as data shows that the Russian economy shrank by 1.9 percent in the previous quarter, well below what economists feared. “The economy has proven to be a little bit more resilient than expected,” said Mr. Osakovskiy.
Others are not convinced that the ruble’s recent success will hold much for the real economy, which still faces some chronic problems.
“While the Russian financial markets may currently be basking in a recovery few could have predicted just months ago, the Russian economy is likely to suffer from secondary effects of the ruble collapse,” said the Brookings’ Mr. Aleksashenko. “The key economic challenges for 2015-16 — elevated inflation, a destabilized budget and a continuing decline in investment — suggest dark clouds are on the horizon for the months ahead.
Simeon Djankov, visiting fellow at the Peterson Institute for International Economics, said in an interview that, while the rally has brought “calm” to Moscow, “all the dangers to the Russian economy remain. The government is eating up its reserve fund, which at the current speed will evaporate late next year.”
The hope, Mr. Djankov said, is that world oil prices will continue to rise from their recent lows and ease the government’s funding crunch.
“If this fails to happen, 2016 will be a second successive recession year, something that Russians have not seen in nearly 20 years,” he said.
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