Frog Legs, Coming Up!
It seems that the frog is now boiled. Today Russia’s central bank dramatically widened the ruble trading band by 10 percent, in contrast to the gradual widenings of about .5 percent that it had permitted frequently over the past couple of months. This comes on the heels of a week in which Russia spent an estimated $30 billion in defending the currency.
The ruble has shown a bit of strength recently. I think this in part reflects a Parthian shot by the central bank that had engaged in a flurry of buying (i.e., selling dollars) to raise some doubt in the minds of speculators about the riskiness of betting against the currency. It also reflects the periodic increase in the demand for rubles that business use to make VAT payments–making this a good time to permit a dirty float because technicals will support the currency for a bit.
The overall market consensus is that Russia took this measure far too late, and thereby exacerbated the country’s economic difficulties, particularly in manufacturing. That’s certainly been my view. One Moscow economist opined:
“It’s inevitable that the ruble will move to the limit of the new band,” said Alexei Moiseyev, economist at Moscow brokerage Renaissance Capital. “This had to be done, but it should have been done faster,” he added.
Economists say the slow ruble decline channeled the government’s bailout funds into currency speculation and deprived companies of vital capital. “We’re paying for this with very bad figures for industrial production,” said Mr. Moiseyev. In December, industrial output plunged 10.3%, according to government figures reported by the Interfax news agency.
Companies across Russia have furloughed workers or cut jobs. More than a million Russians have lost their jobs since the early summer, Interfax reported Thursday, and government officials expect the unemployment rate to rise to 7.5% this year from 6.5% in November, the last month for which data are available.
The central bank apparently cried uncle because speculative pressures were threatening to overwhelm any attempts to support the currency, thereby blowing through the rest of the country’s already depleted reserves:
This month, the central bank sped up the ruble’s decline, but traders say the move only added to pressure on the currency as banks, companies and individuals scrambled to get out of rubles. Central-bank reserves dropped $30 billion in the past week alone.
“For the past two months, everyone was just speculating [against the ruble],” said Yevgeny Gavrilenkov, economist at Troika Dialog, a Moscow investment house. “They weren’t paying debts, barter was rising.”
Who benefited from this policy? The slow motion devaluation helped the government politically. It was also quite helpful to oligarchs who had borrowed in foreign currency. Thus, the government was apparently willing to spend hundreds of billions to save political face and ease oligarchic pain. Who paid the price? Primarily, Russian manufacturers, and the people they employ.
That choice tells you a great deal.
