Reduced to rubbleMore pressure on Russia as rouble’s slump continuesTailspin sparks fears for RussiaOil explained: why the price is falling and dragging the sharemarket down with it
Vladimir Putin may have stared down Tony Abbott and his “shirtfronting” threat at last month’s G20 summit in Brisbane, but the tough-talking Russian President is currently wrestling a mounting economic crisis that will really test his famed resilience.
With the country’s currency, the rouble, in free-fall in recent days, the economy on the brink of recession and a range of Russian companies saddled with debts they may struggle to pay, the first job of the central bank and government is to restore investors’ faith in what is still the world’s 8th biggest economy by some measures.
This confidence started to shake earlier this year with international economic sanctions against the country over its expansion into Ukraine, but has been exacerbated in recent months by the steep slide in the price of oil and other commodities.
Russia relies on crude and refined oil, gas and other hydrocarbon products for more than half of its export income.
As inflows of hard currency such as the US dollar have thinned due to sliding prices, the value of the domestic currency has come under pressure.
A marked sell-down in Russian financial assets as part of a broader investor flight to quality in recent months as the United States moves towards higher interest rates has further undermined the rouble, which has lost more than 15 per cent against the greenback in the last two days and 50 per cent since the beginning of the year.
After digging into official foreign currency reserves to arrest the most recent lightning depreciation, Russia’s central bank on Monday hiked the main short-term interest rate to 17 per cent, from 10.5 per cent.
It was the largest single rate rise since the country’s 1998 debt default, caused by a toxic combination of falling commodity prices, political upheaval, massive fiscal imbalances and broader investor unease in the wake of the Asian asset sell-off of 1997.
Still healthy reserves of more than $US400 billion and a relatively light calendar of interest payments on sovereign debt means Russia is still a long way from needing a lifeline from creditors or multilateral lenders such as the International Monetary Fund.
However, analysts say companies indebted in foreign currencies, including those directly exposed to sinking commodity prices, could come under stress. Also, investor confidence in the country, along with other oil-exporting economies, will remain weak as long as energy prices looks vulnerable.
“The good news is that Russia’s central bank is using interest rates in an attempt to stabilise the rouble rather than spend its foreign exchange reserves,” said Fidelity Worldwide Investments’ emerging market debt portfolio manager Steve Ellis.
“However, I worry that continued falls in the oil price may trump these interest-rate moves in the near term,” he said.
He said he expected more volatility in Russian debt markets as buyers demanded ever-higher premiums with sellers also struggling against the traditionally thin liquidity at this time of the year. However, this was not a re-run of 1998.
“A sovereign debt default is unlikely, bearing in mind the strength of the government balance sheet and the relatively low amount of debt maturing next year,” said Mr Ellis.
“Russian corporate debt holds a greater risk as higher interest rates and a weaker currency are hurting domestic demand.
“In our emerging market debt funds, Russia is one of our largest underweight positions.”
As the rouble loses value, Russians are desperately hedging against further falls by buying hard currency or spending on consumer durables before relative prices – and inflation – gallop away. This could ultimately lead to capital controls, they argue.
“Similarities with 1998 [have] included long lines in front of ATMs and bank branches as people tried to purchase foreign currencies, as well as the looming spectre of capital controls as the Russian authorities attempted to counter increasing capital flight,” wrote Societe Generale’s Phoenix Kalen.
“Legislators proposed last week to impose mandatory sales of up 50 per cent of Russian companies’ foreign currency revenues to into roubles within seven days of receipt in the interest of supporting the local currency.”
Multinationals have also become wary of the rouble’s sinking value. Apple has closed down its online store for Russian consumers because of the currency’s sharp falls.
This story Administrator ready to work first appeared on Nanjing Night Net.