Russian ruble plunges as economy hit hard by falling oil prices, sanctions

The Globe and Mail:  02. December 2014
by BRIAN MILNER

Russia’s central bank is trying to resist a brutal assault on the ruble, but any respite is bound to be short-lived.

The Central Bank of Russia waded into currency markets Monday as the ruble plunged to levels not seen since the 1998 financial crisis that triggered a devaluation and government debt default.

Like the Canadian dollar and the Norwegian krone, the Russian currency has been under extreme pressure amid the collapse in oil prices.

The ruble plunged as much as 6.5 per cent Monday, hitting a record low against the U.S. dollar before retracing some its lost ground to close down 4 per cent, which traders attributed to central bank intervention. The ruble has lost close to 60 per cent of its value against the greenback so far this year.

But if there’s any relief in Russia’s case, it promises to be temporary as a combination of falling oil prices, Western sanctions, capital flight and a string of policy mistakes threaten to drive an already stumbling economy off a cliff, carrying the currency with it.

“What we are seeing is a perfect storm,” said Anders Aslund, a senior fellow with the Peterson Institute for International Economics in Washington.

On Tuesday, the ruble sank for a sixth day, as crude resumed declines and the Economy Ministry said Russia may enter its first recession since 2009 next year. Gross domestic product may shrink 0.8 per cent next year, compared with an earlier estimate of 1.2 per cent growth, Deputy Economy Minister Alexei Vedev said in Moscow.

Despite the Kremlin’s best efforts to deride Western sanctions as little more than an irritant, they are taking a heavy toll on Russia’s financial sector and other parts of the economy.

Gazprom axed a $40-billion (U.S.) pipeline project on Monday that would have carried natural gas to southern Europe while bypassing Ukraine.

As for the ruble, the central bank had largely maintained a hands-off policy in recent weeks while hoping in vain that tighter monetary policy – four rate hikes so far this year, topped by a stunning 150-basis-point jump to 9.5 per cent in October – would do the trick. But the currency continued weakening.

Analysts expect the central bank to raise its key rate again by 100 basis points at its next meeting Dec. 11, despite pressure from lawmakers to loosen policy in response to worsening economic conditions. Several have called for an investigation of the bank’s manoeuvres and are urging more aggressive use of foreign-exchange reserves to prop up the ruble.

But those reserves are eroding more rapidly than many observers realize, Mr. Aslund said, warning that Russia will face a serious financial squeeze in 2015. “The situation is far worse than the Kremlin says.”