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Three myths about the ruble’s miraculous recovery

Reuters/Ilya Naymushin
Artist Vasily Slonov works with Russian roubles and kopecks coins on an artwork “The Reserved Money” based on layers of hundreds of coins stuck together…
By Alexander Polivanov

Editor, Meduza

Published Last updated This article is more than 2 years old.

The Russian ruble has beaten record after record. While at the end of 2014 it was falling in value faster than ever, in the first quarter of 2015, it has become the best currency in the world in terms of growth. This has allowed Russia’s Finance Minister Anton Siluanov to declare that the ruble has become a “strong currency.” Here’s why he’s wrong.

Myth 1: The crisis is over, the ruble has become a strong currency

According to Anton Siluanov, Russia’s finance minister: “The nadir of Russia’s economy has passed and the ruble has become a strong currency.”

A rainy July is not evidence that the whole summer will be rainy.

Here’s why he’s wrong: It’s true that the ruble has gained in strength against the euro and dollar in recent weeks, but if we take into account the last three months, this strengthening looks pretty modest. At the end of 2014, the dollar bought 56 rubles. Now it buys 52. The strengthening of Russia’s currency speaks to the low base effect. Speculators were so anxious to get rid of their rubles several months ago that they drove its price down to the lowest level ever.

The fact that the ruble is far from being a “strong currency” is demonstrated by its growing price. It’s pretty rare for a “strong currency” to fall from 33 to 68 units to the dollar over a few months, then level out at 54. It’s possible that Anton Siluanov means that sharp fluctuations in the ruble’s value won’t be seen again in the coming months, but the Ministry of Finance is in no position to guarantee this, as the price of the ruble is decided on the basis of external factors, such as the situation in Ukraine, sanctions, and the price of oil. These factors are currently relatively stable, but no one can say for sure that they won’t change again.

Finally, it’s no secret that the Russian Ministry of Finance has little need of a strong ruble. Russia is an export-oriented country (more specifically, oriented on the price of oil and gas), and the lower the national currency falls, the more advantageous it is to sell these goods abroad, and less advantageous to import goods.

The drive towards import substitution and the need to fulfill budgetary commitments without increasing government debt both mean that the ministry prefers a weak ruble.

Myth 2: The price of oil has remained low, but the ruble isn’t falling, so the ruble is strong

According to the Washington Post, economists predicted that the ruble will continue to be weak as long as the price of oil remains low, as Russia is highly dependent on oil revenues. But the price of oil has remained low, while the ruble is slowly but surely gaining strength against the dollar.

Here’s why that’s wrong: There’s no disputing that the Russian currency is highly dependent on the oil market—this is a fact. Looking at the end of 2014, it’s important to remember that back then, investors were selling off rubles not just because the price of oil was falling, but because they didn’t know when it would “hit the bottom.” Many of them assumed that oil would fall to 30 or even 20 dollars a barrel and were “trying to stay on top” of the currency market. Now that the price of oil has leveled out between 51-62 dollars a barrel and stayed that way for more than two months, there’s no reason to panic.

The ruble began strengthening back in early Feb. 2015, precisely when the price of oil began to rise. This means that the ruble and oil have not been “decoupled” for two months, or even a month, but for all of a few weeks. Such a short period is clearly insufficient evidence to prove that the ruble is capable of fighting against the low price of oil for a significant period of time, especially without the help of speculators (see the next section). To use a simple analogy: a rainy July is not evidence that the whole summer will be rainy.

Myth 3: Okay fine, so the ruble won’t strengthen, but it won’t fall, either!

The Minister of Economic Development, Aleksei Ulyukayev, has said: “We can now say that the price of the ruble is returning to its fundamental level.”

Here’s why he’s wrong: The minister most likely means that the ruble’s exchange fell because of speculators, and now the price of Russia’s currency is returning to a sort of mythical “exchange rate without speculators’ influence.” At the same time, there is ample evidence that behind the ruble’s growth stand the same speculators who were betting against it just a few months ago. The thing is, speculating on the ruble in the last few weeks has been really easy: borrow credit in currency with a very low interest rate, deposit the money in rubles (lets say at 10 to 15%), and at a certain point do the whole thing in reverse and make profit on the arbitrage. This is a fairly rough description of the scheme, but it captures the main principle. Considering that the ruble has been relatively stable for a few weeks, the risks are practically non-existent.

The Russian Central Bank has been encouraging these speculators in every way it can, giving out “cheap” credit in rubles and maintaining high interest rates (which of course also means a high interest rate on deposits).

But this situation will have to change soon. Firstly, the economy can’t be relaunched with high interest rates, since growing deposits come with growing interest rates on credit. Secondly, the Central Bank would like to beef up its depleted foreign currency reserves during this period of stability in the oil market, and it can only do this by buying foreign currency (in other words, by betting against the ruble).

N.B. We at Meduza don’t believe that we can predict exchange rates or advise our readers what currency they should invest in. The aim of this article is merely to show that there are different points of view on the changes in the ruble’s exchange rate.

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