Russia's ruble dives as central bank lifts trading band
Country heads into recession as sanctions bite and falling oil prices cut export earnings
The Russian ruble fell against the U.S. dollar and the euro on Tuesday, a day after the country’s central bank said it would allow the currency to float freely.
Already down 30 per cent against the U.S. dollar this year, the ruble is under pressure because of falling oil prices, Western sanctions on Russia and a domestic economy that is moving into recession.
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The Russian central bank said on Monday it had abandoned its efforts to keep the ruble in a narrow trading corridor and would only intervene in foreign currency markets if it saw a threat to financial stability.
The Russian currency bounced higher on Monday on the news, only to decline again Tuesday.
The move spares the central bank from burning billions in reserves on supporting the currency, as investors dump the ruble.
Historic low for ruble
The ruble hit an historic low of 48 to the U.S. dollar on Friday — down from 32 in January.
That forces the prices of imports higher and hurts Russian consumers already concerned about the rising price of groceries and basics.
Western sanctions over the fighting by Russia-backed separatists in eastern Ukraine are beginning to bite. Deals have been cancelled and foreign investment halted because of the sanctions.
"The problem is we still have this big shadow of east Ukraine, the threat of sanctions is hanging over the whole economy and the currency," said Chris Weafer, an analyst at Macro Advisory in Moscow.
The falling price of oil limits opportunities for Russia to bring in more currency. Russia’s economic prosperity depends on oil and gas exports and the Brent crude price it gets is at a four-year low. A new deal to sell to China may improve its export earnings.
While the government’s budget is predicated on oil in the $100 US range, Brent is now selling at below $82 US a barrel.
The confidence enjoyed by Russian President Vladimir Putin is based, in part, on the prosperity Russians have enjoyed over the last few years. A falling currency, inflation and rising prices seem set to threaten that prosperity.
Russia’s central bank is predicting zero growth for the Russian economy in 2015 and only 0.1 per cent growth in 2016. Inflation is at about eight per cent and will only decrease to four per cent in 2017, it said.
The base interest rate set by the central bank is already high – it was boosted to 9.5 per cent last month from 5.5 per cent. This is having the effect of discouraging domestic investment and further stifling the economy.
Before floating the ruble, the central bank was spending its reserves in an effort to stabilize the currency. It had $510 billion at the start of the year, but only about $400 million remains.
Now it plans to limit loans to banks that use the money to go out and buy dollars, which it calls “speculative demand.”
The ruble is also expected to come under more pressure next year, when Russian companies and banks will have to pay back about $100 billuon in hard currency debts
Speaking in Beijing at the Asia-Pacific Economic Cooperation summit, Putin vowed that the government won't impose any capital controls.
"We have seen speculative fluctuations of the rate, but I think it will end soon in the face of action taken by the central bank in response to action by speculators," Putin said.
With files from the Associated Press