The Parallax Brief


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

Ruble will Remain Stable in Short Term

The Ruble has remained stable against the bi-currency basket today, extending a run of over a week in which it has hovered above its lower limit, much as the Parallax Brief predicted it would.

The Parallax Brief is sticking to its prediction that the ruble will remain at around 41 against the basket in the short term at least, and here’s why:

The credibility of the Russian government and monetary authorities is at stake

The Central Bank of Russia has drawn a line in the snow at RUB41 against the basket, and has said that the ruble will not drop below this point until there is a further deterioration in the Russian economic outlook. If it were to drop its defence of the ruble now, it would lose all credibility – likely triggering a nasty freefall. This cannot be allowed to happen, so while the bank can further devalue in the face of, say, increased capital flight, or another drop in the price of Urals crude, without such a signal, it will defend its position.

Monetary tightening speaks louder than words.

Notwithstanding 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 positions – and it is now employing this method with devastating effect.

What many people do not grasp is that speculation against the ruble was mostly a local phenomenon in which excess liquidity provided by the CBR and Russian Ministry of Finance was used by Russian banks to bet against the ruble. The Central Bank is now garroting liquidity, leaving local players with no cash with which to bet against the ruble.

Liquidity tightening has the dual effect of making bets against the ruble more exacting, and sending a clear signal that the Central Bank is willing to play hardball. The message appears to be getting through, as the ruble has stabilized without the need for CBR FX intervention.

The ruble has devalued more than its contemporaries.

As risk appetite has plummeted, capital flows into emerging markets (EMs) have gone into agonizing reverse. EM counties across the world have had to devalue, but Russia’s BRIC contemporaries have all devalued their currencies by far less than Russia. Since April 2008, the ruble has fallen 38% against a basket of 50% euros and 50% dollars (NB: this has a different composition than the bi-currency basket to which the ruble is pegged). This compares to only 9% for the Indian rupee, 19% for the Brazilian real and a 13% appreciation for the Chinese renminbi. Even Korea – which has been economically flagellated of late – has only devalued the won by 26% over the same period.

The Parallax Brief is becoming increasingly bearish about prospects for the world economy, increasing the chances of further drops in raw material demand, and therefore prices. In this environment, the ruble might be expected to drop further – but not yet. Expect to see the ruble at around 41 to the basket for at least a month.

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