A turbulent week is over for the ruble, but the widening policy divide it revealed within Russian officialdom is here to stay.
(Bloomberg) — A turbulent week is over for the ruble, but the widening policy divide it revealed within Russian officialdom is here to stay.
As the currency neared the level of 100 per dollar, authorities sprung into action. But behind the scenes, the rescue operation showed a government that’s rarely been so split on matters of critical economic priorities — a vulnerability at a time the country is trying to sustain the biggest conflict in Europe since World War II.
The sparring over the ruble’s plunge focused on what caused it just as much as on what to do about it. After long warning of deteriorating trade figures and heavy government spending, the central bank led by Governor Elvira Nabiullina announced it would refrain from foreign-exchange purchases and then called a Tuesday emergency meeting that resulted in the steepest interest-rate hike since the immediate aftermath of the Ukraine invasion.
At the heart of the matter is a currency that’s been the world’s most volatile this year, leaving policymakers in pursuit of a radical fix such as capital controls but with little consensus over how or when to implement them.
With the ruble feeling the heat early in the week, President Vladimir Putin’s chief economic adviser put the blame on the Bank of Russia for its “soft” monetary policy, contrasting it with a budget situation he said has stabilized.
“The Russian central bank appears to be getting dragged into ‘proving its responsibility’ by criticism from government economists and ministers,” Commerzbank AG analysts including Antje Praefcke said in a report.
“The recent rate hike appeared very much as if the Bank of Russia had been put in a corner by such criticisms,” they said. Its “reaction to comply with the demanded action could be setting a dangerous precedent by one of the sole remaining credible institutions of present day Russia.”
Government discussions over capital controls meanwhile initially pitted Finance Minister Anton Siluanov — who advocated harsh compulsory sales of foreign revenues for exporters — against his opponents at the central bank, according to people familiar with the deliberations.
In the span of just a few days, the ruble was on the mend, especially once the market learned that tighter capital controls were back on the government’s agenda. It soon left the ranks of hobbled currencies like Argentina’s peso and the Turkish lira to become the best performer in the world with a gain of about 6% against the dollar.
Maxim Oreshkin, Putin’s economic aide and a former banker at Societe Generale SA’s Russian unit, had penned a column for a state news agency that mentioned neither war nor sanctions. Published near the peak of the ruble’s declines, he advocated a “strong” national currency to help transform the economy and left no doubt it was up to the central bank to use “all the necessary tools to normalize the situation in the near future.”
In the discussions of capital controls that included Nabiullina, the central bank faced off against Siluanov, who became finance minister after his predecessor left the government in 2011 because of a public feud with then-President Dmitry Medvedev over military spending.
Siluanov initially argued in favor of the forced conversion by exporters of up to 90% of their foreign revenues, a stringent measure opposed by the Bank of Russia, said the people, who requested anonymity to speak about deliberations that aren’t public.
Others present in the meetings, such as Economy Minister Maxim Reshetnikov, didn’t take a strong position and eventually joined Oreshkin in siding with the central bank.
The decision — reached before the top officials met with Putin — was to stop short of compulsory restrictions and instead prepare recommendations for exporters on an individual company basis to surrender more of their foreign revenues to help stabilize the ruble. Formal capital controls might still be an option if the depreciation gets worse again, the people said.
The case made by the Bank of Russia stressed that what determines the exchange rate is the balance of risks and the differential between rates abroad and inside Russia, they said. No matter the severity of capital controls, the central bank said, companies would eventually find workarounds while businesses and the population might shun the ruble.
What Bloomberg Economics Says…
“Discussions around the ruble proved the influence over the economy is shifting from the government to corporations, whose decisions steer the currency more than before. Domestic political considerations favor tighter monetary policy to help reduce the visible costs of war. To achieve this objective the Bank of Russia has to change its rates more aggressively than ever, as higher rates no longer attract flows from foreign bond investors.”
—Alexander Isakov, Russia economist.
A shift toward settling trade in currencies other than the dollar and the euro has also cut into the flow of hard currency into the country just as the value of revenues from energy exports slumped during a recovery in imports.
As a result, domestic assets are now more at the mercy of the price of oil and the opaque flow of money from exporters, while a boom in lending and labor shortages put pressure on inflation at home.
“Ruble volatility is amplified by lower FX market liquidity and non-regular conversion by the exporters,” Raiffeisenbank’s analysts said in a report, putting the Russian currency’s “fair range” as implied by the fundamentals at 85 to 95 per dollar.
For Oleg Vyugin, a former top central bank and Finance Ministry official, the dueling approaches aired this week reflect the difficulty of the movement of capital that’s grown murkier, routed through traders who borrow and pay exporters in rubles but collect revenue in hard currency. The difference leads to a windfall for intermediaries outside the government’s reach, he said.
The result is “capital flight through exports” at a time when trade is already becoming far less dollarized, Vyugin said. The proposal for compulsory currency sales means the Finance Ministry “didn’t fully understand the problem, but the central bank saw that such controls were possible but would be difficult to enforce,” he said.
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