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Capital markets

Moscow unfazed by ruble depreciation

The Russian ruble is in free-fall dragged down by a capital outflow in the wake of tighter US monetary policy. But unlike other emerging economies, Moscow fails to stem the capital flight, raising ire among investors.

Russia's ruble currency has been on a downward slide for weeks, hitting an all-time low to the euro of 48.5 rubles at the end of January. About a month ago, Russians had to pay 45 rubles to acquire the single European currency, while the exchange rate was still 40 rubles to the euro at the beginning of 2013.

The decline by 20 percent over the year in the Russian currency is partly a result of tighter monetary policy in the United States, which has led to an outflow of capital from emerging markets to the US in the hope for higher returns on investment there.

No surprises

With regard to Russia, however, the ruble's slide had been foreseeable well before the US Federal Reserve announced in mid-December it was reducing its monetary support for the US economy, said Andreas Männicke. Männicke who publishes the East Stock Trends financial newsletter told investors in early December to bet on a fall of the Russian currency.

Ruble falls to record low

Similar warnings were issued by the German Chambers of Commerce and Industry (DIHK), the organization's foreign trade expert Volker Treier told DW. Russia "announced long ago that it was aiming for full convertibility of the rubel and a free-floating exchange rate," Treier said, adding that it was therefore clear which way the currency would go.

As a matter of fact, Russia's central bank had kept the ruble on a tight leash in the past. But in 2013, it gradually began reducing its ruble purchases in support of the currency's exchange rate. However, some analysts were hoping the country's vast foreign currency reserves accumulated from its oil and gas exports might shield the ruble from depreciating.

Weak growth, high inflation add to worries

In 2013, Russia's economic woes mounted, driving down economic growth to a meager 1.3 percent - substantially lower than the 3.6 percent expected at the beginning of the year. Moreover, annual inflation picked up strongly. Coupled with a general lack of investment security in Russia, the worsening business environment had set off capital flight from the country long before it began to hit other emerging economies.

According to Commerzbank analyst Thu Lan Nguyen, the Russian central bank could have stopped the rubel's free-fall, pointing to its enormous currency reserves. However, Moscow's currency market interventions had merely been aimed at bolstering the rubel retreat in an orderly fashion, she told DW.

"Faced with weak growth and rising inflation, the only avenue open for a central bank to stimulate the economy is a gradual depreciation of the currency," Nguyen said, adding that a weak rubel was conducive to growth as it strengthened the competitiveness of domestic businesses on foreign markets.

Foreign investors losing out

But what is good for Russian businesses is bad for foreign exporters who come to feel the pinch of a diminishing purchasing power of their Russian customers. No wonder then that Germany's trade with Russia declined 5 percent last year, even though German exporters were not the most affected, DIHK's Treier said.

oil pumping station (photo: picture alliance)

Russia's huge oil and gas revenue is likely to shield the ruble as commodity prices are expected to rise

Stronger hit by the ruble fall, he added, were those companies which had invested in Russia seeking the benefits of a growing home market. "The ruble fall strongly hits the profits of those who produce in and for the Russian market," Treier said. He also mentioned a further boost to inflation amid rising production costs as a downside of the currency depreciation. This might eventually force the central bank to raise interest rates, like in Turkey and India recently, further throttling growth, he added.

Banking on forex bulk

However, the situation in Russia isn't as bad as in most emerging economies, Commerzbank analyst Nguyen said.

Elvira Nabiullina,

Nabiullina stays calm in the face of the ruble turmoil

"Thanks to its oil revenue, Russia still has a current account surplus which makes it independent of capital imports from abroad. This sets it apart from countries such as Turkey or South Africa which consume more than they export," she said.

Russia, indeed, seems to be aware of this advantage. But Russian Central Bank chief Elvira Nabiullina recently said that the country's current account surplus was propping up the rubel exchange rate and would soon lead to a new strength of the currency.

DW.DE

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