Putin Doesn't Care if the Ruble Falls
From a technical point of view, the Russian ruble's drop to more than 40 per U.S. dollar, a full 17 percent weaker than at the start of the year, is an expected result of Russian companies being cut off from Western financial markets and a drop in the price of oil.
On a different level, however, the ruble's downward journey reflects the economic structure that makes it possible for President Vladimir Putin to remain popular. The government isn't interested in defending the ruble, because a weak currency benefits the resource exporters who are the main source of revenues for the Russian government. The price inflation that results amounts to a tax on ordinary citizens to fundPutin's aggressive policies, yet these people are a less important constituency in Russia. And, for now at least, they are happy to pay for the country's international resurgence, such as it is.
Yesterday, when the ruble closed below the 40 to the dollar for the first time in history, the Central Bank appeared to go on a work-to-rule strike, even as it intervened to support it. Four times during the day -- each time it spent $350 million -- the bank expanded the band in which the ruble is allowed to move against a dollar-euro basket by 5 kopeks, to see if the market had found a new -- if lower -- equilibrium. Then, at 6 p.m. sharp, it stopped intervening because the working day was over. None of that behavior suggests a sense of crisis.
As much as it was steadying the ruble's slide, the Central Bank was also letting companies stock up on foreign exchange so they can meet fourth-quarter debt servicing requirements. There is a redemption peak looming in December, and Morgan Stanley has estimated total fourth quarter debt repayments by Russian banks and industrial firms at $47 billion, compared with $26 billion in the third quarter. Since Russian entities now have trouble raising money in the U.S. and Europe, the Central Bank is stepping in as the only remaining funding source. Its foreign exchange reserves have shrunk to $454 billion from $457 billion last week, still big enough to cover debtors' needs for a long time to come.
The other reason the ruble is declining is that it's an oil currency and oil prices are in retreat. After capital flight from Russia hit $48.8 billion dollars in the first quarter, following Russia's annexation of Crimea, it dropped to $25.8 billion in the second quarter and the ruble's exchange rate returned to its normal correlation with the oil price. This chart from Standard & Poor's October 8 report shows how it happened:
Oil and gas exports accounted for 52.9 percent of Russian fiscal revenues between January and April of this year. The mainly state-controlled companies providing this revenue stream have ruble-denominated costs and, as export prices go down, they welcome the national currency's weakening.
Citizens and non-resource-oriented businesses provide a smaller share of the government's revenues. Indeed, about 30 percent of working Russians -- police, teachers, doctors, bureaucrats and the increasingly important military -- are recipients of state funding first and taxpayers second. Russia is in the grip of a classic resource curse: The government, which controls the hydrocarbons, is a benefactor for Putin's core voters rather than a service to be controlled by the people. Political commentator Kirill Rogov calls these government dependents the Rent Party.
The importance of the Rent Party explains Russians' quiet acceptance of the runaway inflation that accompanies the ruble's drop. Official numbers -- just a 0.24 percent consumer price rise in August and a 0.65 percent jump in September -- do not do the trend justice. According to 2011 data, the latest available from Russia's official statistics agency, imports accounted for 43 percent of Russia's retail trade volume. Because of the devaluation and decreased competition from imports following Putin's food embargo, specific goods have seen double-digit price rises in August and September.
The enforced self-sufficiency caused by the weak currency and sanctions may even have benefited Russia in some ways, allowing domestic producers to invest and expand. Standard & Poor's points out that, because of the export substitution effect, Russian industrial production has been growing faster than in 2013. This is a bad moment for such shock therapy, however, because of the oil price decline.
If the price of oil goes on falling, the Rent Party will be in double jeopardy, facing both shrinking subsidies and rising inflation. Putin's continued support depends on how deeply these scissors cut and how long they keep cutting. The oil price, not sanctions, will be the main determinant of that.
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