Capital flees Russia – the ruble falls

Russia's ruble has sunk to new lows this year under the weight of international sanctions.

The Russian ruble has hit a series of fresh record lows in the past few days. The US dollar now buys more than 40 rubles marking a fall of almost a fifth since the start of the year. Only the Argentinian peso has done worse against the dollar in 2014.

The ruble is also around 45 to its euro-dollar basket, the main gauge used by the Russian central bank, which allows the currency to move in a trading band. The central bank has spent almost $2bn on buying rubles to try to temper the decline in the past few days, the heaviest intervention since March.

What the commentators said

Russia's economic problems "appeared long before the annexation of Crimea", said The Economist. The growth model of recent years was to funnel profits from oil and gas sales into the consumer economy. But that had "petered out",and Russia badly needed "innovationand investment" to move up a gear.Now, thanks to sanctions and the falling oil price, the economy is on the slide.

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As political tension and the poor backdrop prompt capital to flee the country, the currency falls, fuelling inflation, which is already uncomfortably high at 8%. Moscow's ban on importing food from states that imposed sanctions hasn't helped, as it has cut food supplies, said Andrey Ostroukh in The Wall Street Journal.

To stem the exodus of foreign money, and squeeze out inflation, the central bank has had to raise interest rates three times this year, and another hike is expected soon. That has further undermined growth.

The sanctions have slashed Russian firms' access to the capital markets, which raises the prospect of a corporate credit crunch, added Kathrin Hille in the Financial Times.

They have enough liquidity to meet their 2015 debt obligations, according to credit-rating agency Moody's, but 2016 and 2017 will be a problem if they don't regain international markets. Meanwhile, they have to repay $134bn of external debt between now and the end of 2015, which will see more money leave Russia.

Meanwhile, the price of oil has fallen well below the average level factored into Russia's 2014 budget.

In short, said The Economist, Russia risks a "cycle of low or zero growth, high inflation, and ruble devaluation". With national security providing a pretext for more state interference in the economy, a sustainable recovery is further away than ever.

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.