Overnight, on 15-16 December, the Central Bank of Russia re-examined its key interest rate, raising it to 17% trying to stabilise the rouble. However, the next day (already called ‘Black Tuesday’), the exchange rate reached 121 roubles to the pound. The Central Bank hopes that the Russian people’s experience of previous crises will help them, and businesses, weather the storm.
A perfect storm
‘The situation is critical. A year ago, even our worst nightmares didn’t stretch to what’s happening right now,’ says Deputy Chairman of the Russian Central Bank, Sergei Shevtsov. But the signs had been there for a while. The devaluation of the rouble had actually started at the end of August when several negative factors all hit at once — inflation, a falling oil price, sanctions, and the stagnating Russian economy.
While the Central Bank’s measures on 15-16 December (including making non-guaranteed credit more difficult to receive) were designed to stabilise the rouble, economists and representatives of the relevant ministries admit that the rate should have been raised far earlier. At the opening of trade on Tuesday, the rouble strengthened (94 roubles to the pound, down from 102). Yet by 1500 UTC, people were panicking; and Black Tuesday saw the rouble break the psychological barrier of 100 roubles to the euro, and 80 to the dollar.
Representatives of business have reacted negatively to the Central Bank’s base rate hike. Boris Titov, a government business ombudsman, says that ‘It doesn’t make sense to shore up the rouble at the expense of the development of the economy. The Central Bank’s raising of the key interest rate means that when commercial banks come to refinance, it will cost 17% interest. As a result, business plans are changing under the pressure of thinking about production costs and profitability.
‘It doesn’t make sense to shore up the rouble at the expense of the development of the economy.’
‘Each year, you’ll have to give 17% of your investment resources to the banks. Even more, given that the banks need to cover their own margins. That is, the real rate today is more than 20%. Therefore, any project should be 20% more competitive than the proposals of foreign competitors.’
Alexander Elinson, a member of the business association Business Russia, agrees:
‘I have only emotions at the moment. The Central Bank’s measures will lead to only one thing — ruining Russian businesses. I am afraid that you cannot stop people panicking about the currency. When the rouble loses 10% of its value in one day, it’s already too late to stop people panicking.’
The falling rouble has taken its toll on the traditional consumer boom in the run-up to New Year. People have panicked, lining up in front of ATMs and shops in order to invest their devaluing currency in something tangible: food or household appliances.
One person was carrying out a refrigerator and a washing machine
By Tuesday evening, people were already sharing pictures of supermarket queues on social media. As one eyewitness described the situation in Moscow to the radio station Kommersant-FM, ‘The queue for the M-Video shop on Sadovo-Kudrinskaya street covered the whole store. One person was carrying out a refrigerator and a washing machine. Words cannot describe what was happening in the road that runs past the car park: several lanes were at a standstill with cars waiting to park. The IKEA at Belaya Dacha [one of Europe’s largest shopping malls] was a real sight. People just swept everything off the shelves. There were enormous queues for appliances, kitchens, sofas — up to 30 people for each.
‘It was the same in the warehouse. The queues started at the entrance to the warehouse. There were about 70 people in each queue. And this is all connected to the rouble. This is what people are saying.’
The return of 2008
Experts have begun to talk of a financial crisis, drawing analogies with the events of 1998 and 2008. As Deputy Chairman of the Central Bank Sergei Shevtsov warns, the situation is comparable to the darkest period of 2008. Indeed, the Central Bank’s November forecast calls the potential scenario whereby the oil price hits $60 a barrel ‘stressful.’ In this scenario, Russian GDP falls by 4 percentage points in 2015. Former rector of the New Economics School in Moscow, Sergei Guriev, says that Russia has already entered this scenario. Guriev stated on the independent internet TV channel Dozhd’: ‘We are already beyond the forecasted mild recession. I think we are in serious trouble. The main problem is not the rouble, but the decline in revenues, rising prices and unemployment.’
‘We are already beyond the forecasted mild recession. I think we are in serious trouble.’
During the emergency cabinet meeting on Monday, the government decided to increase the supply of foreign currency in the market, thus reducing demand for it, as well as replacing foreign currency with ‘exchangeable liquid assets in roubles.’ Minister of Economic Development, Alexei Ulyukayev, stated that the regulator and the government had agreed to support reliable and high-quality borrowers. Legislative changes are now on the cards in order to provide banks with greater amounts of capital. However, Ulyukaev ruled out the possibility of introducing foreign exchange controls.
Resolving the difficult economic situation depends on how quickly and efficiently the authorities react to negative signals in the market. While sanctions close off opportunities for refinancing external debt, Russian counter-sanctions continue to feed inflation; and the government cannot rely on a significant increase in the oil price. Given how politicised economic decisions are in Russia, and that Russia’s leading financial institutions depend on the political will of the country, solving the crisis will be no easy task.
At the annual press conference on 18 November, while President Putin seemed to offer little in the way of concrete actions to be taken in response to the financial situation, he did talk of combatting speculators by telephone.
Grigory Dubovitsky (RIA Novosti): Vladimir Vladimirovich, the situation on the currency market is developing by the day. Many experts, including yourself have said that this is partially the result of actions taken by currency speculators. Who are they, could you give us their names? Are they Russians or foreigners? And why can’t we face up to them? Are we so weak, or are they so strong?
Vladimir Putin: This is what our Ukrainian partners did. That is, force businesses, exporters, to sell. But it’s ineffective. The Central Bank is not planning to limit our exports judging by the current figures. This does not mean that the government cannot influence the situation via its representatives in boards of directors. But we are not planning to make any direct instructions.
As to the speculators, they can be foreigners, different funds, or companies. And on the whole, this is part of the market economy. Speculators always appear when there’s an opportunity to make money — creating a favourable situation for oneself in the market. The Central Bank has stopped its currency interventions. It’s another question of whether that could have been done earlier and more stridently. But that’s a question of taste.
‘Speculators always appear when there’s an opportunity to make money’
As to who exactly these people are, I had a chat with some of them on the telephone yesterday — in a friendly manner. I asked one of them, “could you hold off?” He thinks for a minute, and says: “Well, we’ve got to keep up with our credit payments.” I ask him, “But can you have a go?” He says: “Well, in general, we have three billion stashed away.” Three billion dollars! Do you understand what kind of money this is? This isn’t 30 kopeks. And this is only the reserve fund of one company. So if we take this as an average, you know, we’d be looking at not 30, but 300 billion dollars. We need to regulate that somehow, we have to talk, come to some agreement.’