Rouble teeters on slippery slope
By Robert M Cutler
MONTREAL - The Russian rouble has stabilized within 1% of 33 to the US dollar
over the past 10 days, ever since the rumor started to circulate that the
Russian Central Bank would cease its policy of effectively devaluing the
currency step by step. That policy had seen the rouble decline by roughly 2%
per day over the first eight trading days of the New Year.
This managed devaluation, which actually began in November and had occurred in
21 steps, had seen the rouble steadily lose about a quarter of its value (and
nearly a third since August) and made betting against the currency too easy.
(See Rouble
joins Russia's pointers to decline, Asia Times Online, December 4,
2008.) It also cost the Russian Central Bank more than one third of what had
been its record foreign reserves of nearly US$600 billion last August.
The Russian Central Bank was reported to have told leading
financial institutions in the country on January 20 that that process was over.
Two days later it widened the band within which it would allow the rouble to
move against its foreign currency basket benchmark (currently 55% US dollars
and 45% euros).
In such a managed float (also called a "dirty float"), the currency market is
in general allowed to determine the value of a national currency while the
central bank still intervenes to palliate external economic shocks or otherwise
alter overall patterns in the fluctuation of the currency's value, rather than
trying to influence it on a day-to-day basis. The rouble will now be allowed to
float within the relatively wide range of 26 to 41 to the dollar, assuming that
the exchange rate of 1.3 dollars to 1 euro and their current balance within the
foreign currency basket benchmark remains unchanged.
The rouble will test the 41 level and there is a possibility it could reach as
low as 50 against the basket, Elina Ribakova, Citigroup's chief economist in
Moscow, said this week, according to a Bloomberg report.
The value of the rouble depends inordinately on the price of oil in the world
energy market - Russia is the world's second-largest oil exporter, after only
Saudi Arabia. Prime Minister Vladimir Putin has directed the government to
review its budget using the valuation of $41 per barrel for the Russian
benchmark Urals crude. The price of Urals crude has tumbled about 68% since
last July when it stood at a record $142.50 a barrel. It was trading this week
at about $44.52 a barrel.
Deputy Prime Minister and Finance Minister Alexei Kudrin insists that the
priority must be controlling inflation, and also diminishing the foreseeable
government budget deficits.
Reports in the Russian press are beginning to give substance to the notion of
an emerging split between Putin and President Dmitry Medvedev. What is
important here is, first, the institutionalization of a divergence of interests
between their respective staffs and acolytes and, second, the emerging struggle
between factions representing interests not only over the implementation (or
lack thereof) of anti-crisis measures ordered by the president but over the
control and procedures of the security and police structures.
In particular, the first instance of policy conflict between the two factions
within the Interior Ministry has emerged over whether to suppress brutally or
to permit popular demonstrations against economic hardship. This development
promises increasing subterranean political conflict, as the scope for routine
political opposition (for example through parliamentary parties as well as the
media) has been reduced to extremely narrow dimensions while popular hardship
will not soon decrease.
The Russian stock market has stabilized over the past several months, since the
rouble's controlled devaluation began. Both the RTS and the MICEX are now in a
range between 500 and 700 following a "dead cat bounce" to roughly 900 last
November. This means that the former is down nearly 80% and the latter nearly
75% from their May 2008 highs.
Investment advisors in Moscow are even recommending the accumulation of Russian
equities, particularly given that by consensus they are now trading at a 3.0
forward-looking price-to-earnings ratio. It is telling, however, that this
advice is dispensed with the caveat that what is being awaited is merely a bear
market rally.
The low valuations in the Russian equity markets reflect this uncertainty and
also the possibility of still further losses as well as the need to weather all
those storms before any return can be realized. The current range in the
indexes of 500 to 700 is where they both found themselves for some time in
2004-2005 before the spectacular run-up in the worldwide commodity boom that
has now burst. Any further important decline would mark the 500 level as a
significant resistance to the upside.
It is perhaps wishful thinking, then, on Putin's part to believe that the
economy will begin to turn around in the second half of 2009. It may well give
the appearance of doing so, but there are signs emerging globally of the danger
of a double-dip recession, where that recovery, which would not be limited to
Russia, will be interrupted by a renewed crisis. If specialists in Russian
equities are looking for a bear market rally, remember that this means that
they expect the bear market to continue afterwards. That would not relieve the
economic hardship.
Still, a recent poll by the Moscow-based Levada Center reveals that more
Russians fear hardship than they do the curtailment of political freedoms. In
the absence of either parliamentary or extra-parliamentary means for the
expression of political opposition, the fight over Russia's future direction
will be fought out in the entrails of the state and para-statal bureaucracy.
The floating of the rouble may become a sign of Putin's sinking: the collapse
of oil prices may one day be seen as the beginning of post-Putinism. But not
for sure, and not quite yet.
Robert M Cutler(http://www.robertcutler.org) is a senior research
fellow at the Institute of European, Russian and Eurasian Studies, Carleton
University, Canada. (Copyright 2009 Asia Times Online (Holdings) Ltd.
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