Only six months ago, Russia was flying high, with oil prices at record levels and money pouring into the country. But as oil prices have tumbled and global risk aversion has risen, Russia's growth has slid from an annual rate of around 7% to near-zero, says Lidia Kelly in The Wall Street Journal; 2008 saw a net capital outflow of $130bn. With the current account heading into the red, the rouble has slid sharply from its record highs of last summer. In the past two months it has shed over a fifth of its value against a basket of euros and dollars. Against the greenback, it has hit a record low of Rbs 32.
Rather than allow a large, one-off adjustment, which the government fears would shatter confidence by bringing back memories of the crash in the rouble during the crisis of 1998 which wiped out the population's savings overnight the authorities have opted to devalue the currency gradually, using Russia's huge stash of foreign currency reserves to manage the decline. But it has burned through over $150bn of its $600bn in currency reserves in the last four months of 2008; last week alone it is thought to have spent over $12bn.
And the step-by-step approach has fuelled speculation over further devaluations and increased the pressure on the currency: the Russian population spent $30bn buying dollars in the fourth quarter. The rouble may fall by at least another 15%, given the outlook for the current account, says Neil Shearing of Capital Economics. Moreover, any further devaluation will have to be accompanied by higher interest rates to reduce the outflow of capital. Without this, the currency will remain under pressure.
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
-
Trouble brews in B&M as bargain shops take a hitOpinion Once a stock market darling, B&M's share price has slumped. What has gone wrong for bargain shops?
-
US and China reach a ceasefire in their trade war after talks in LondonThe US and China's trading relationship – the most important one in the global economy – is back on track. Will the truce last?
