Rouble under attack as Russia's economy sinks
The low oil price is damaging Russia's economy and its currency, with the ruble down 35% against the dollar in the past six months.
"Harsh winter; devaluation of the currency; protests. No, not the UK," said FT.com's Alphaville, but Russia. The authorities are on the defensive over the slide in the rouble. It has fallen by 35% against the dollar in the past six months. Slumping oil prices are set to tip the current account and the government budget into deficit this year and, along with a credit freeze, send growth into negative territory for the first time since the 1998 ruble crisis. $148bn of capital fled the country in the second half of last year.
The government was worried that a sharp drop in the currency would shatter confidence and threaten political stability as it did in the 1998 crisis, which wiped out the population's savings. So it has burned through a third of its currency reserves, slowing the currency's adjustment, and recently tried to put a floor under the ruble by allowing it to move in a wider band against its euro/dollar basket. But the currency has been scraping the lower edge of the band, even though the government has raised interest rates to attract capital.
The scene is set for a "showdown with speculators", said Capital Economics. To stem the outflow of capital undermining the ruble and defend the trading band, interest rates may need to rise by another 2.5%. But this is about the last thing the economy needs as it heads into recession, while lower foreign exchange reserves have eroded Russia's ability to weather a long slump. No wonder ratings agency Fitch cut Russia credit rating this week for the first time since 1998.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
FTSE 100 hits record highs – why is it rising and will we see more gains?
Advice UK equities have been described as unloved for a long time but as the FTSE 100 hits new highs, we explain if now is the time to buy British.
By Marc Shoffman Published
-
How to invest in copper
It may be time to invest in copper as the red metal appears poised for a big jump. Dominic Frisby looks at what should investors should buy
By Dominic Frisby Published