The Parallax Brief


Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Ruble Devaluation Enters Endgame

The Russian ruble finished stronger against the bi-currency basket yesterday (Tuesday 20 January), and has this morning strengthened again, perhaps signaling that ruble devaluation is approaching its end.

The ruble is ‘pegged’ by the Central Bank of Russia (CBR) against a currency ‘basket’ of 55% US dollars and 45% euros. The CBR intervenes in the market — either by selling rubles or buying them to weaken or strengthen the currency, respectively — in order to keep the ruble within a designated trading band against the basket. However, even a pegged currency must bow to economic reality, and with Brent crude at USD41 instead of USD141, the ruble had to be weakened.

But instead of a one-off drop of, say, 25%, the CBR embarked on what many viewed as a costly fudge: a step-by-step devaluation. Economists didn’t like it. Chris Weafer, chief strategist at Moscow based investment bank UralSib argued,

“If the government had actually announced a one-off devaluation of around 30 percent in the autumn the issue would probably be done and dusted by now. Instead, the salami-slice approach that the central bank is using has created considerable uncertainty and the expectation of further weakness”

The managed devaluation was a mechanism born not out of economic orthodoxy, but political expediency. It was designed to avoid spooking a population thrice savaged by devaluation – which might have led to a run on the banks – and as a face-saver for the government. But paradoxically, Russia’s slow devaluation ended up increasing the pressure on the ruble by raising expectations that more would follow, encouraging both speculators to place bets on further slippage and the population to switch savings into ‘harder’ currencies.

Further, the CBR still has to use its dollar reserves to stop the ruble dropping more than a percentage point or so every day, meaning that reserves are eaten up almost as fast as they would have been holding steady.

We are now approaching the point where the ruble must be held at a sustainable level. Russia may have had the third largest reserves in the world, but they are not infinite, and by the end of last week, which saw the fastest rate of devaluation so far, the real amount available for defending the currency had dropped to around USD200 bn.

At the same time, the ruble has lost between 20 and 25% of its value against the basket since the process started, approaching a valuation that makes economic sense, and is sustainable. The CBR now needs to force speculators to close their positions against the ruble in order to relieve pressure. It also needs to signal that the end has arrived, and the ruble will be defended at a position of the central bank’s choosing.

But how would it achieve this?

The CBR has two options: First, it can hold the ruble steady against the basket, sending a strong, if tacit, signal that the process is over and short positions should be unwound. Second, it could squeeze ruble liquidity. The Russian banking system as a whole owes the CBR vast quantities of money, and at the same time the CBR is the main source of liquidity. If the CBR tightens supply, demand for ruble liquidity will increase.

And in the last two days, we have seen something like option two. For the first time in years (perhaps ever) short term indebtedness to the CBR exceeds the liquidity banks have available in CBR deposit accounts. Further, the CBR plans to offer ‘only’ RUB80 bn at its ‘deposit auctions’ this week. Ruble liquidity is being throttled. Yesterday, the ruble actually gained against the basket for 50 minutes, during which time, according to my contact, only a few hundred million dollars were traded – a miniscule volume.

The problem with this method is that banks are already gasping for liquidity. If the CBR squeezes too hard, large swathes of the banking system – even those who haven’t been playing ruble devaluation arbitrage – may go bust.

Readers who have been converting savings or wages into ‘harder’ currencies may want to pause. Those with money saved in smaller banks might want to watch carefully what happens next.

The slow drift of devaluation is coming to a close.

Filed under: Economics, Russia, , , , , , , ,

4 Responses

  1. […] the Parallax Brief argued that the step-by-step, managed devaluation of the ruble was approaching its endgame, and today we received further confirmation. First, the ruble held steady against the basket for […]

  2. […] Ruble Devaluation Officially Over Two days after the Parallax Brief predicted that the devaluation of the ruble was approaching its endgame, the Central Bank of Russia has distributed a statement to reporters that the process is […]

  3. […] the Parallax Brief predicted it would do, the CBR is squeezing ruble liquidity in order to bolster the defense of the ruble. Last week, the […]

  4. […] its verbal promises, the Parallax Brief has long argued that the CBR would tighten monetary policy in order to force speculators off their ruble short […]

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