The ruble reached record lows against the euro and the dollar last week.

Photographer: Andrey Rudakov/Bloomberg

Who Benefits From a Floating Ruble?

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.
Read More.
a | A

Allowing the ruble to float freely is the best tool the Russian Central Bank has to stop speculative attacks on the currency. But, as is often the case with Russia under President Vladimir Putin, it may also favor corruption.

The ruble reached record lows against the euro and the dollar last week, and has fallen 50 percent against the dollar since the beginning of the year. The freefall could no longer be explained by the central bank’s dutiful efforts to supply big Russian companies with the hard currency they needed to repay $47 billion in external debt in the fourth quarter. In October alone, the bank spent $27.2 billion buying rubles.

To many observers, the ruble appeared to be the target of a speculative onslaught, a panic.

Sergei Parkhomenko, an anti-Putin journalist and publisher, posted a satirical description of the situation on Facebook:

The lines to the ATMs at my bank snake out into the street and go past the display windows. People are scooping out rubles and hurrying away with them. Everybody appears to be inspired by the president’s positive forecasts. I can see with my own eyes how trust in the national currency is strengthening. People’s eyes shine with the joy at the long-awaited possession of Crimea.

Parkhomenko's allusion to “the president’s positive forecasts” referred to Putin’s confident statement at the Asia-Pacific Economic Cooperation summit in Beijing that “we witness speculative ruble exchange rate surges today, but I believe that this will stop soon.”

Putin has reason for his optimism. The Central Bank today abolished its policy of letting the Russian currency move within a certain band relative to a dollar-euro basket and of intervening, or expanding the band, when the boundaries were crossed. That amounts to floating the ruble, which the central bank has long wanted to do.

Konstantin Sonin, one of Russia’s few internationally recognized economists, wrote in a column for the business daily Vedomosti that a floating rate created formidable obstacles for speculators: “They would need to guess not just the final result, but intermediate ones, too -- what if the public reacts too slowly? What if the ruble changes trajectory and rises sharply?”

In other words, the strategy will deter speculators because attacking a free-floating currency is risky and costly.

The new central bank policy and the verbal interventions from top officials, including Putin himself, pushed up the ruble 3 percent today, to 45 to the dollar. That doesn’t mean its downward slide is arrested. The ruble is an oil currency, and if oil prices slide any further, it will resume its downward movement.

The central bank, however, will not stand by passively. In its statement on the abolition of the “corridor,”it promised to intervene on the foreign exchange market “in case of threats to financial stability.”

That could create the opportunity for corruption, according to Sonin: “If the Central Bank is going to intervene unexpectedly to punish speculators, information about its actions will be worth lots of money. Even in the least corrupt countries with the strongest institutions that would have created strong corrupting pressure.”

Putin's government isn't interested in a strong ruble now: As low oil prices make it difficult to balance the budget and as exporters, many of them state-controlled, complain about the lack of access to Western capital markets, a devaluation is the first order of business. What Putin doesn’t need is panic among ordinary Russians, which could damage his high approval ratings. As long as the central bank does its job of reducing volatility and deterring speculators, bank insiders will be free to use information about the timing of interventions to make a bit of money on the side. And Russia has a lot of hard currency to burn -- $454.2 billion in international reserves at the beginning of November.

That logic, however, only holds if one believes -- as Putin does, according to Kremlin insiders -- that both the Western sanctions against Russia and, more importantly, the oil price drop are only temporary. If they last longer than a year or two, Russia will be in real, long-term financial trouble and it will be harder for Putin to hold on to unlimited power.

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:
Max Berley at mberley@bloomberg.net