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How Putin Stopped the Ruble's Collapse

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The Russian ruble, which last week briefly became the world's worst-performing currency, is rebounding, as is the battered Russian stock market. That doesn't mean President Vladimir Putin's economic team has managed to fully stabilize the currency or resolve any of the underlying problems that led to its recent plunge.

At first glance, the ruble and Russian stocks are doing well: They have recouped their losses faster than the oil price, which has merely stopped falling in recent days:

Bloomberg

The current rate of less than 55 per U.S. dollar seems miraculous after last week's "Black Tuesday," which saw the ruble almost reach 80 per U.S. dollar. That decline followed a surprise decision by the Russian Central Bank to increase its key lending rate 6.5 percentage points to 17 percent, and it appeared the monetary authorities could do nothing short of introducing currency controls to halt the rout.

Nigeria's oil currency, the naira, is only down 4 percent  against the dollar in the last 30 days, unlike the ruble, which lost almost 37 percent at its lowest point. Yet the African country's central bank has not been shy to impose a mild version of currency controls. It has banned local lenders from holding open forex positions overnight and required them to use purchased foreign currency within 48 hours, or sell it to regulator. 

Russia has so far avoided introducing the kinds of measures, such as a moratorium on foreign debt repayment and an order to trade in 100 percent of foreign revenues for rubles, that were applied after its domestic debt default in 1998. Instead, the government is demonstrating the broad formal and informal control over the Russian economy it has acquired during Putin's rule.

The government is working through the boards of directors of state-controlled companies to give them until March 2015 to reduce the balances in their hard currency accounts to the level of October 1, 2014. Private companies are being told to do the same or face the Kremlin's ire -- a suggestion that can be as effective as a direct order in a country that has no real private property guarantees.  Swissquote, an online bank, estimates that the requirement means a gradual sell-off of $50 billion, sparing the central bank the need to deplete its international reserves to hold up the ruble. Besides, one more company selling hard currency is one less player betting on the ruble's further decline.

So far, the tactic is working, even though there's been no sudden change in dollar and euro trading volumes on the Moscow Exchange. Short-sellers have become hesitant to bet against the ruble, knowing that some big foreign currency sales are coming. Here's how the number of short ruble contracts on CME, the world's biggest derivatives marketplace, has dropped lately:

Bloomberg

That gives the Russian monetary authorities some breathing space, but that's all. The Central Bank already has to deal with the consequences of the ineffective rate hike. The interbank market has seized up, with banks unwilling to lend to each other. The overnight MosPrime rate, at which top banks fund each other, stands at 23.5 percent.  With liquidity this tight, it's only a matter of time before banks start failing. 

The country's 28th biggest bank by assets, Trust, yesterday received a 30 billion ruble ($546 million) bailout from the central bank. It is unlikely to be the last to crumble, given that Russian financial institutions are cut off from Western credit markets by the fallout from the U.S. and European sanctions, and there’s no viable domestic alternative. 

The Central Bank cannot, however, lower its key interest rate now because that would send the wrong signal to the market. It would force big companies to give up their dollar cash for nothing.

So, what if the oil price keeps going down, if there's no sanction-ending deal in Ukraine, or other positive external event? Putin says the Russian economy will reformat itself to push out imports and increase domestic production, but the ruble can be slaughtered again faster than this will happen. 

It's clear now that the Russian monetary authorities need to keep the ruble at the current level to minimize the risk of mass protest. "Black Tuesday" took Russian dangerously close to the brink: People rushed to the stores to buy up electronics and anything that was still selling at "old" prices, they cleaned the supplies of dollars and euros at currency exchanges, and poured out so much anger at the government on social networks that another ruble plunge could create too much political tension. As it is, Russians are going to be hit with double-digit inflation early next year as importers rewrite price tags and local producers adjust to the rising prices of foreign ingredients and equipment.

It doesn't take long to list all the resources still available to the government and the Central Bank if -- or, rather, when -- they need to fight off another attack on the ruble. There's the $24 billion currency swap China has offered to help prop up the ruble; international reserves, which won't last long against a sustained attack; and currency controls. Moody's, the ratings agency, sees the risk of their introduction as quite high. Last night, it lowered the rating ceiling on Russian issuers' foreign-denominated bonds, saying:

The decision to place the foreign currency bond ceiling at the same level as the government bond rating reflects Moody's assessment of the very high likelihood that foreign exchange controls preventing non-sovereign issuers from servicing their foreign currency debt obligations would be imposed by the government in the event that it defaulted on its own debt. Moody's also notes that the risk of the government imposing moratorium restrictions even in the absence of its own default has risen, in the context of the significant currency depreciation and given its ability to control access to foreign exchange reserves. 

Given that this last resort is still available, it's unlikely Russia will cry uncle on Ukraine anytime soon. Even if talks in Minsk over the Christmas break prolong the current ceasefire and yield a deal on control of the Russian-Ukrainian border, that won't mean Putin is about to surrender. The improved performance of the ruble and Russian stocks in the last few days is going to give him fresh confidence in his country's resilience.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Marc Champion at mchampion7@bloomberg.net