Streetwise Professor

December 15, 2014

Ruble Rocket to Russia

Filed under: Economics,Energy,Politics,Russia — The Professor @ 7:55 pm

What a wild day. The Ruble weakened dramatically from the open this morning (15 December), falling about 2.5 percent. Then the Russian Central Bank intervened, spending a rumored $1 billion to prop up the currency. This caused about an 86 pip rally, but this lasted for mere moments, and then the Ruble rocketed lower, reaching 64.24 by the end of the day. That’s down a mere 10.22 percent boys and girls. (The weird thing about currencies quoted like the Ruble is that up is down.)

Here’s the ugly picture. You can see the little bitty (and very temporary) impact of the intervention at a little after 8am.

Screen Shot 2014-12-15 at 7.26.48 PM

In other words, the RCB blew $1 billion for a blip. A billion here, a billion there, and you’re talking real money. In so doing, the RCB gifted those evil speculators whom Vlad inveighed against about $65 million in a few short hours. Merry Christmas!

Ominously, this decline was not a response to a similar decline in the price of oil. Although oil ended down on the day, it was rallying on news from Libya at the time that the Ruble was plunging. What precipitated it? One leading candidate is Friday’s announcement that Ru626b in Rosneft bonds could be used as collateral at the RCB: this approval came much more rapidly than normal. Thus, in effect, the RCB was lending rubles to Rosneft, using bond investors as cutouts. Rosneft felt obliged to issue a press release saying that “not a single ruble, raised within the bond issue, will be used to buy foreign currencies.” Note the weasel phrase: obviously rubles are fungible, so the loan frees up other rubles for Rosneft to sell. Meaning that this smacks of an RCB bailout of Rosneft. This is bad enough, but it could also foreshadow similar actions for other beleaguered Russian companies.

Then, in the very early hours of the 16th, Moscow time, the RCB announced a whopping 650 basis point increase in the interest rate, from 10.5 percent to 17 percent.

The initial effect has been to bring the Ruble back under 60. There is reason to doubt that this will last. First, previous rate increases-though not as big as this-had only a temporary effect on the relentless decline in the currency. Moreover, the rate rise will be highly contractionary, and a weakening economy will put downward pressure on the Ruble. Further, people draw inferences from central bank actions: perhaps the RCB is signaling a very serious fundamental weakness or an impending bank run or its belief that many Russian corporates will be dumping rubles to raise dollars and Euros; any of these signals would mean that its intervention could have the perverse effect of fueling a further decline. In addition, the rate rise does nothing to eliminate the need of Russian firms to obtain dollars to repay maturing debts.

Even if the rate intervention works in the sense of stabilizing, or even reversing, the collapse in the currency, this will come at a cost. As I noted, the effect of the rate rise will be highly contractionary. The government had already been predicting a recession. That is now a certainty, and it is likely to be a severe one. Especially if oil continues doing the limbo.

The RCB action reminds me of a fox chewing off its snared leg. The best of some very bad options.

The situation is obviously volatile, with many things going on (including pronounced weakening in other emerging market currencies and stock markets as well as the oil situation). Moreover, it will no doubt engender a political response, which will feed back onto the markets. How it will affect the increasingly paranoid Putin is hard to know. A climbdown (if credible) in Ukraine would do wonders for the Ruble, but methinks Putin is more likely to double down than climb down.

One prediction is safe: the next days will be memorable. Deserving of some memorable music: Rocket to Russia, by the Ramones.

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  1. SWP:

    Based on your comment “situation is obviously volatile, with many things going on (including pronounced weakening in other emerging market currencies and stock markets,” might Helicopter Ben & his successor Janet, Queen of the Doves actually be right in fearing deflation?

    And if they are correct in assessing the symptom, what is the best course for the Fed, since Obama & Congress are both apparently content to continue to fiddle?

    VP VP

    Vlad is always keen to your round table of wise men (including LL, not male, but VERY wise).

    Comment by Vlad — December 15, 2014 @ 8:16 pm

  2. A decline as swift as has been seen in the ruble will have plenty of sellers on any rally. Has anyone come up with an estimate of the amount Putin is going to have to find to meet maturing debt plus new borrowings for the next 18 months?

    Comment by Charles — December 15, 2014 @ 8:34 pm

  3. vvp is very, very wise. His economy proves it.

    Comment by beelza — December 15, 2014 @ 9:15 pm

  4. Best interpretation comes of course from zerohedge: “17%! What a deal for savers. Can you imagine getting anything like that in COMMUNIST AMERIKA?!” expect amount of hyperventiliation over there to go in overdrive. Prediction: more Gold = money/America=doomed posts.

    Comment by d — December 15, 2014 @ 9:47 pm

  5. @d-Hilarious. But that’s the Zerohedge Automatic Post Generator at work. The conclusion is always the same, like you say: gold=money/Amerikkka is doomed, and Amerikkka is doomed because it doesn’t recognize gold as money.

    The ProfessorComment by The Professor — December 15, 2014 @ 9:54 pm

  6. I have a friend who for years has been the manager of several high-end shopping centres in Moscow and St. Petersburg. He says that most of the Russian consumer spending boom has been driven by credit, with most households way over their heads in debt. What makes this problem particularly acute was that Rouble loans attracted an interest rate of 15-20% whereas Euro or USD loans attracted only 5-8%, and so many people opted to take loans in the latter. How they will pay back these loans from a Rouble salary is anyone’s guess.

    Comment by Tim Newman — December 16, 2014 @ 4:15 am

  7. So what would happen if the Russians do switch, like some like to speculate, to a golden rouble?

    Comment by LL — December 16, 2014 @ 5:51 am

  8. Prof
    Surely more appropriate would be John Cale’s Mercenaries 🙂 …

    So what you think? Tanks racing towards Kiev? An ‘incident’ in airspace over the Baltic?

    Or a peace conference? It would buy time. I hear Munich is rather festive at this time of year.

    MICEX closed. I’m placing my bet on Munich.

    Comment by SimpleSimon — December 16, 2014 @ 5:58 am

  9. By the way, I wonder what poor Sublime Oblivion is thinking about it all? Weren’t the melting ice caps supposed to have catapulted Russia’s northern wastelands into the Eastern Seaboard by now?

    Comment by Tim Newman — December 16, 2014 @ 8:24 am

  10. @Tim Newman: I bet Sublime Oblivion is trying to figure out how many posts have to be made to troll the internet when the going rate for posts keeps getting paid in fixed rubles.

    “I’m Getting Nothing for Christmas” can be substituted for “I’m Getting Rubles for Christmas”.

    Comment by Blackshoe — December 16, 2014 @ 9:28 am

  11. @LL – I’m not sure what Russia would gain by pegging the ruble to gold. One, Russia has zero credibility that it’s nothing more than a temporary tactic to lure in speculators and then double cross them. There is little evidence Russia wants a law based state that will protect holders of its currency; and lots of evidence it is a predatory state that needs to steal a lot of money from other people to retain the loyalty of its cronies. How many people would really think that holding the ruble is just as good as having the gold in their hands when Putin has a history of confiscating the wealth of others whenever it is convenient? Two, since Putin needs to steal a lot of money from other people to retain the loyalty of its cronies, it needs to be able to do so. Converting the ruble to gold hurts that ability. He needs to feed the sharks lest they consume him, or he destroys them which eliminates his power base.

    Comment by Chris — December 16, 2014 @ 12:57 pm

  12. ll — for a historical example you can compare either the original gold standard return in France in the 1930s vs countries that abandoned the gold standard or you can compare it to the very temporary and very disastrous attempts during the Asian Crisis to raise interest rates.
    But lets examine what the mechanism of a dollar-ruble would be: or rather, what would be the thing that give it stability? Interest rates are at 17%, what would ruble-gold do in the face of that? At present the issue for Russia isnt fear of the money supply exploding, its a combination of fears: inept kleptocracy that ran the country into the ground and then chose a geopolitical confrontation with an empire infinitely richer, stronger and morally attractive. Would a golden ruble keep Sechin from forcing the Central Bank to fork over hard currency to him? Would the golden ruble prop up oil somehow magically? The two mechanisms the gold standard used to engender was a natural balance of payment resolution system (you run a persistent trade deficit vs me and I dont loan you money, you run out of gold and are forced to jack up interest rates, causing an internal crisis that kills your imports and your wage-per-hour) and to maintain high real interest rates which Russia has introduced.

    Comment by d — December 16, 2014 @ 1:09 pm

  13. […] […]

    Pingback by From the Archives: 12/16/2014 Edition | whatsjohnreading — December 16, 2014 @ 2:42 pm

  14. Chris, thank you, but I had in mind an act more unusual in our times: to mint actual gold coins for free circulation.

    Comment by LL — December 16, 2014 @ 4:29 pm

  15. “Tell me, what happened with the rouble?”
    “It sank.”

    Comment by Ivan — December 17, 2014 @ 10:45 am

  16. Ivan-That’s perfect.

    The ProfessorComment by The Professor — December 17, 2014 @ 11:52 am

  17. @charles-Estimates are that Russian companies owe $125 billion in hard currency payments over the next 12 months. Rosneft owes $8 billion on a bridge loan, due Monday. It then owes another $11 billion (if memory serves) in February.

    The ProfessorComment by The Professor — December 17, 2014 @ 12:51 pm

  18. @LL – I’m a bit confused by what you mean. There are lots of countries who already make gold bullion coins including the US and Russia. The Russian gold bullion coin is called the Saint George (like the American coin is the Gold Eagle, the Canadian the Maple Lead, South African the Krugerrand). So I don’t know what you mean by being different. They may have a nominative currency value (the one troy ounce Gold Eagle is US$50), but the real value is always the price of the bullion. So it sounds like you are saying what happens if Russia completely replaces its currency with bullion coins.

    Gold coins actually make very bad money (as a medium of exchange) since their worth is so high. It’s like carrying around a $1000 bill. How are you going to get change? Even if you make coins much smaller than 1 oz (lots of countries have coins as low as 1/10 or 1/20 troy ounce), that value is still much higher than most transactions. So going to a system where all coinage is bullion based will create a lot of practical issues. What happens when the price of bullion fluctuates? Even minting enough coins to circulate is going to take a large time. I’m not sure what the purpose of this route would be. Of course, maybe this just becomes the equivalent of old fashioned “junk silver” coinage that nations used to have when a nominal amount of precious metals were used. Still, whenever you use a bimetallic system, whenever the ratio of silver to gold changes, your currency becomes screwed up because the face value of the coins no longer reflect their actual value in bullion.

    Even if it is somehow practical to do, I don’t see why Putin would want that. It makes it much harder for Putin to control currency exchange. Russia could see even more money leave the economy as Russians send their coins to bank deposit boxes in countries with a much stronger rule of law. It makes it harder for Putin to manipulate things to reward his cronies and stooge the taxpayer (like the recent loan to Rosneft so that it could buy dollars and pay back the ruble loan with worthless rubles later). Fundamentally, going to a gold standard does not aid Putin in what he wants – which is greater control of Russia and Russia’s near abroad.

    I have the feeling you have something else in mind, but I don’t know what it is.

    Comment by Chris — December 17, 2014 @ 1:01 pm

  19. zerohedge is still the best: newspaper report from China — we are worried that swap deal we signed with Russia is a loser as their currency tanks ZH editorializing — China will save Russia to create a Eurasian Super Union that will defeat Jew dominated Kommunist Amerikkka with gold-oil based yuanble.

    Comment by d — December 18, 2014 @ 2:25 am

  20. @d-I had seen that. It was hilarious. Talk about putting a totally misleading spin on what the Chinese paper said. That was amazing even by ZH standards. I was wondering if they were reading the same article I did. Not only is ZH a troll, it’s a lame troll.

    The ProfessorComment by The Professor — December 18, 2014 @ 11:21 am

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