Monday, 6 of April of 2020

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Ruble exchange rate manipulation as key to weathering the crisis

During the nationwide broadcast by Prime Minister Vladimir Putin, he said that Russia would avoid “sharp jumps” in the ruble as it fell to the lowest level against the dollar in almost three years.

The ruble, which the central bank manages against a euro-dollar basket, on Monday had weakened to as much as 0.6 percent to 28.0908 per dollar, the lowest since March 2006, as the U.S. currency rose against the euro. The value of the ruble has declined by 16 percent since Aug. 1.

“We will not allow sharp jumps in the economy and in the exchange rate of the national currency,” Putin said in televised comments in Moscow on Thursday. “We will carefully use our currency reserves and other government funds, and if we carry out a balanced, considered and responsible economic policy, this money will be enough for us.”

The reserves have fallen 24 percent since reaching a peak of $598.1 billion in August as the central bank sold foreign currencies to prop up the ruble, Bloomberg reported.

Putin, who remains Russia’s most influential leader, fears that costs for the country’s economy as economic growth slows and the ruble weakens would be enormous.

Additional threats to the economy are falling profits in the energy, chemicals and metals export sector and the withdrawal of investment capital from the country, which has totaled about $190 billion since the start of August, according to BNP Paribas.

Experts say the government is taking unprecedented measures in the fiscal policy to reverse these negative trends.

“In 2008, the Russian central bank increased the refinancing rates six times. The last two changes of the refinancing rates amounted to one percent and were conducted on Nov. 12 and Dec 1, correspondingly. At the moment, the interest rate in Russia is 13 percent, among the highest in the developing countries,” said Anton Kozirev, general manager of Fibo St. Petersburg.

He added that from a Forex (foreign exchange) point of view, increasing loan rates could lead to a fall in consumer demand for goods, causing traders to sell the national currency resulting in further downward pressure on the ruble.

There are additional factors adding to this pressure.

“Among the most important are: monetary policy and macroeconomic factors such as the unemployment rate, retail sales and the level of inflation. Commodity price fluctuations (especially oil and gold prices), and the current political situation also have a big influence on exchange rates,” said Irina Kormilitsyna, senior analyst at Rosfinconsulting finance and analysis center.

Many investors are trying to sell the cheap currency they possess amid decreasing growth of the economy and the rise of the U.S. currency against the euro and ruble.

At the height of the 1998 crisis when Russia defaulted on debts of $40 billion and devalued the ruble, the mass selling of rubles for dollars became endemic. It wiped out the life savings of millions of people overnight and pushed the government to the edge of bankruptcy.

“Most likely people still haven’t forgotten those times when there was a ‘dollarization of the economy.’ Neither in Europe nor in other regions do people rush to throw out the euro, the pound or the franc in favor of the dollar, while here it’s a common reaction when a crisis appears, and it can only aggravate it,” said Yegor Susin, head of the analysis department at Alpari (Russia).

The Russian economy has expanded by seven percent a year since 1999 and may grow only one to two percent in 2009, Gary Dugan, Merrill Lynch & Co.’s chief investment officer, told Bloomberg.

While the ruble declined against the dollar, it appreciated 0.4 percent to 35.3450 against the euro. Those movements left it little changed at 31.3212 against the basket that the central bank uses to control its fluctuations. Hence, some experts have differing opinions about the ongoing decline of the ruble while agreeing that the destabilization of the ruble is out of question.

“Almost all current media reports talk about the ruble’s decline, but at the moment it is more honest to say that the U.S. dollar is rising. The central bank uses not only the U.S. currency, but a basket of dollars and euros to control ruble fluctuations, creating conditions for stabilizing it with such measures as intervening on the domestic currency market,” Susin said. He added that measures such as the expansion of the exchange-rate limits of the currency basket would limit the possibilities for speculation on the Forex market.

According to analysts, a weaker ruble may benefit Russian oil producers as they sell crude on a dollar basis and pay most expenses in rubles. Rosneft, Russia’s biggest oil producer, is cutting finance costs by paying back ruble debt with a cheaper currency.

“As crude oil prices are declining, the government cannot hold the ruble rate against the dollar at the current level, because it could be a blow to the economy and its competitiveness and could lead to the exhaustion of currency reserves,” said Susin.

However, the government plans further tax cuts from Jan. 1 for oil companies to help reduce domestic gasoline prices. Russian companies that fail to get funds through the banking system may be able to turn to the government for “a large scale” capital injection, Putin said.

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