Three weeks ago, I forecast that the Russian ruble would continue to fall as long as the oil price was falling – provided that politicians did not interfere. The Central Bank of Russia (CBR) had effectively floated the currency earlier than planned, though with the caveat that it would intervene to defend domestic financial stability. At the time of my post, there were already signs that the ruble and the oil price were beginning to move in lockstep.
As the chart below shows, it is now very evident that the ruble is tracking the oil price. The CBR’s attempts to support the currency explain the shallower curve from July to October. But now both the oil price and the ruble are falling off a cliff:
RUB/USD versus Brent Crude. Chart from Tomas Hirst at Business Insider.
This is extremely painful for the Russian economy. Although the falling ruble offsets the damage to a net oil exporter that falling oil prices inflicts, Russia suffers badly from Dutch disease because of the dominance of its energy industry, which means that other sectors are relatively undeveloped and many items – including essential foodstuffs – are imported. Inflation is now rising fast and the CBR may be forced to raise interest rates again soon, inflicting further damage on an already fragile economy.
Businesses, too, are suffering as the falling ruble makes their debts increasingly difficult to service. Tomas Hirst at Business Insider notes that Russian businesses have $35bn of FX debt payments falling due in December, which many may struggle to meet.
Recession in Russia is now a certainty. The only question is how deep and prolonged it will be, and that depends on two things – the behaviour of the oil price, and the effectiveness of Western sanctions. And, of course, how Russian politicians react to both of these.
OPEC’s decision not to cut production was a disappointment to those who hoped that the oil price fall would be arrested at around $80 a barrel. It is now well below that, although it rallied towards the end of trading today. But is it likely to stabilize soon? Possibly. Analyst views are mixed: Citigroup Citigroup has called bottom, but others think the oil price could continue to fall, perhaps to as low as $40 a barrel. It is worth noting that the “pinch point” at which US shale oil production starts to become uneconomic is thought to be somewhere between $50 and $70 a barrel: if OPEC’s purpose in allowing the price to fall is to choke off US shale oil production, as some think, we would expect the oil price to stabilize when shale comes under pressure. After all, OPEC producers have no reason to allow the price to fall any further than strictly necessary to maintain their global dominance.
The CBR’s deputy governor has indicated that a price of $60 a barrel is being budgeted for, which would be a considerable hit to Russia’s public finances. Unsurprisingly, some politicians are beginning to panic. Capital controls are openly being discussed, though not yet seriously considered. And according to Ambrose Evans-Pritchard of the Daily Telegraph, a Russian populist politician called for criminal investigation of the CBR on the grounds that it had been taken over by “feminist liberals”, presumably a reference to the fact that both the Governor and the Deputy Governor are women. Apparently the prosecutor’s office has agreed to this insane idea. Anything for a quiet life, it seems.