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.
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