Nightmare on the Russian Central Bank street

Outlook  for Russian economy looks gloomy in 2015

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Russian Central Bank raised its key interest rate from 10.5 to 17% per annum, but the Russian ruble set a record fall after the 1998 crisis. The end of last month in the currency market has forced Russia to remember how it seemed long forgotten crisis in 1998, when the rate of the Russian ruble against the dollar fell about 3 times. Now the dollar increased 2-fold compared with the value at the end of June this year.

 

Decline of the ruble

On Monday, December 15, the rate of the ruble against the dollar fell by 9.3%. The fall was due to an increase in demand for foreign currency at low volumes of foreign exchange intervention of the Central Bank of Russia.

That led to this increase in demand remains unclear. Some experts suggest that the company “Rosneft’” was bought the currency, before it placed bonds for 625 billion RUB, but the company denied this assumption.

Perhaps this has resulted in widely discussed over the weekend, 13-14 December, the statement of the minister of the Saudi oil Suhail Al Mazrui that OPEC will not collect an extraordinary meeting about oil prices. He said that even if the prices will collapse to 40 USD per barrel, OPEC will wait at least three months before you discuss the possibility of a new meeting.

The arisen prospect of lower prices to USD 40 and lower, perhaps frightened by someone in Russia. Most likely, it was the cause of the events since the beginning of last week the exchange rates of many oil-producing countries fell.

Whatever it was called, the ruble collapsed, that was not unnoticed by the Central Bank of Russia, which is November 10, withdrew from the regulation of the ruble, limited symbolic interventions and the provision of foreign currency loans to banks. The Central Bank has finally decided to act, and on the night of December 15 to 16, decided to raise from December 16 its key rate from 10.5 to 17% per annum. This is the most significant one-time increase in the key rate since 1998.

The announcement of this was made about the morning on December 16 that pretty scared foreign exchange market participants. The Central Bank explained the results of his demarche few vague: “This decision is due to the need to limit significantly increased in recent devaluation and inflation risks.” In addition, the Central Bank increased the maximum amount of funds to repurchase auctions in foreign currency for a period of 28 days from $ 1.5 billion. USD 5 billion. USD.

After the message of the decision of the Central Russian experts expressed the hope that the foreign exchange market to stabilize. However, the opposite has happened: the panic only intensified as market participants decided that the central bank panicked.

As a result, immediately after Black Monday had a black Tuesday. By the close of trading on December 16 at 20 pm, the euro stood at 85,56 RUB / EUR, the dollar – 68,18 RUB / USD.

 

Survival instead of life

On December 16, the performance of Chairman of the Board of the Central Bank of Elvira Nabiullina on TV channel “Russia 24” did not calm the market. She tried to explain the actions of the Central Bank, but even more scared of all, as it turned out that there were no other real measures to stabilize the ruble exchange rate the central bank is not going to take and intend to wait until the market calms down itself.

She stated that the Central Bank has no plans to introduce any administrative restrictions to address the volatility of the ruble that is not planning sets the control of the movement of capital.

In addition, Nabiullina said that the weakening of the ruble is the “signal” that Russia must learn to live in a new environment, relying on domestic ruble prices, and begin to import substitution. It is a strange opinion, because since the fall of the ruble reduces the ability of enterprises to purchase modern equipment. Vladimir Dmitriev, the head of the Foreign Trade Bank, pointed out this fact. In an interview with TASS, he said that to implement the program on import substitution banks to lend in foreign currency, as well as production of the enterprises realizes in rubles, they have after weakening do not have enough funds to cover payments.

No less strange was held on the same day first deputy chairman of the Central Bank of Russia Sergei Shvetsov, which strengthened the panic, saying that “the situation is critical.” “A year ago we even in a nightmare could not imagine that this is possible,” – he said.

About the decision to raise the benchmark interest rate to 17% Shvetsov said that the Board of Directors of the Central Bank made this decision, “choosing between bad and very bad option.” In addition, he admitted that he does not know what will happen in the future: “We made this decision and what it will have consequences for the market and the economy, I will not undertake to predict.” He clearly just what is bad and all will have to survive. “In the near future the situation will be comparable with the most difficult period in 2008. We already have experience of crisis. I hope that it will help market participants to survive in difficult times,” – said Deputy Chairman of the Central Bank. Mr. Shvetsov tactfully silent of the fact that it is the central bank has driven the economy in such condition that it is forced to survive.

On Wednesday, December 17, Prime Minister Dmitry Medvedev held a meeting with the financial and economic department of the government, the leadership of the Central Bank, as well as with the heads of the largest exporter-companies.

“Everyone recognizes that the ruble is undervalued today. Its course mismatches with fundamentals and does not reflect the state of the economy,” – said the existence of the problem of the Prime Minister. However, he was not accused of going on the Central Bank, and the events called “playing on the emotions.”

Nevertheless, the government began to act: Dmitry Medvedev demanded that the state-owned enterprises to provide rhythmic and stable implementation of foreign currency in order to avoid changes of the ruble. At the same time, the initiative of deputies of the State Duma proposes to introduce mandatory sale of 50% of foreign exchange earnings, has been rejected.

That is, the government does not want to legally enter the administrative restrictions on the movement of capital, but it does so indirectly: in the form of a recommendation of the Prime Minister. In fact, it means the introduction of some form of capital controls.

In addition, according to Dmitry Medvedev, the government is going to take other measures, in particular to increase the amount of foreign currency bank refinancing, and to ensure the balance between demand and supply of foreign currency by increasing the provision of foreign currency liquidity if needed. At the same time, he stressed that “there is no point in introducing an extremely strict regulation of this sector, which has been in a certain period. It is useful to what is not.”

Without waiting for the Central Bank, the initiative decided to show the Russian Ministry of Finance, reporting that he was ready to sell the currency held by it.

Russian President Vladimir Putin endorsed taken by the Government and the Central Bank steps. On December 18, he said this at the annual press conference. However, it is slightly chided his officials, noting that they could act and efficiently.

Vladimir Putin listed the measures that the central bank has taken: raising the key rate, the reduction of ruble liquidity and exchange allocation to needy banks. In addition, the president said that the Prime Minister met with the leaders of the largest companies in the country over the sale of foreign exchange earnings, and a definite result of these steps is, the so-called rebound ruble happening.

“So, of course, it’s possible to “run down ” on Nabiullina, but do not forget that in general, their policy is adequate. Not only the Central Bank is responsible for the economic situation in the country”, – concluded Putin.

However, as it turned out, he did put his hand to stabilize the situation. Namely, two days before the press conference, he was on the phone with some of the currency speculators and friendship asked the question: what do they hold the money? One of them explained his actions by saying that they will soon have to pay for loans, but then “found in somewhere 3 billion. USD”.

How can I understand the President, other than those listed, no other measures are planned. The Central Bank and the Russian government is not going to demand from Russian exporters of compulsory sale of foreign exchange earnings, as well as to limit them to the acquisition of currency on the domestic market. Not planned and fixing the ruble exchange rate and currency speculators can still work on the Russian market.

Whatever it was, but the joint efforts of the Government, the Central Bank and the Ministry of Finance stopped the fall of the ruble. The official exchange rate of December 20 amounted to 60,68 RUB / USD. However, the future course remains unclear as yet not eliminate the causes that led to it.

 

Will Nabiullina resign?

Moreover, while the Russian government has not yet realized that the main reason for the crisis – is not of falling oil prices and economic sanctions, and unprofessional actions of directors of the Central Bank.

They actually repeated the mistake that the leadership of Belarus in 2011, eliminated from taking action in the foreign exchange market in order to preserve foreign reserves. And their own banks and enterprises in Russia behave as they should be: banks are trying to capitalize on the growth of the dollar, especially since the ruble loans offered to them for speculation the central bank itself, and the company hold the currency to capitalize on its growth rate.

This is quite obvious and natural behavior of economic entities, and the Central Bank should have foreseen it. Moreover, many Russian experts and financiers warned of possible negative consequences and offered to take measure, which is now entered in an emergency procedure.

Namely, in the early autumn of using administrative resources necessary to organize regular currency sales at least state-owned enterprises and increase rates on ruble resources of the Central Bank to a level to make speculative transactions with dollars unprofitable. And banks and businesses that have lost access to the currency as a result of Western sanctions, it was necessary to provide funds from reserves.

That is, it was necessary to immediately do what the Government is only now. This would reduce the demand for currency and would ensure its constant inflow on the Moscow stock exchange, which would reduce the pressure on the foreign exchange reserves of the country. The ruble exchange rate would be reduced at the same time, but slowly and by the amount that is fundamentally sound. On what kind of hard to say, because it depends on the price of oil. But it is clear that tens of percent, rather than hundreds. Apparently, the exchange rate must be in the range of 40-50 RUB / USD.