Global Daily – A new ruble crisis?

by: Peter de Bruin , Georgette Boele

Global-Daily-Insight-13-November-2014.pdf ()
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  • The more than 40% decline of the ruble versus the dollar has raised fears of a new Russian ruble crisis
  • However, Russia’s economic fundamentals are far healthier than back in 1998…
  • …while the weakness in the ruble may have largely run its course

A new ruble crisis?

The more than 40% decline in the value of the Russian ruble against the dollar this year has prompted some to speculate that Russia is about to experience another ruble crisis like the one we saw in 1998. While it is difficult to compare Russia’s economy in 1998 with its economy today, it provides an interesting point of comparison.

 Negative impact on the banking sector

An ongoing slide in the ruble will affect Russia’s banking sector. Indeed, according to Russia’s central bank, banks in Russia in August of this year, had around $190bn of foreign currency loans in their books. This represents around 10% of Russian GDP. In comparison, foreign currency loans amounted to just 3.8% of GDP in 1999 (unfortunately the data do not run further then 1999). A lower ruble will make it more difficult for companies to service these loans, which would thus lead to a deterioration of the quality of banks’ assets. On the liability side of their balance sheets, Russian banks have external debt of around $190bn (worth around 10%). Again, this is sharply up from levels seen in 1998, when banks’ external debt was just $10bn (worth around 4% of GDP), though foreign liabilities to total funds remain relatively modest. All else equal, a weaker ruble will push up the value of banks’ external debt, eroding banks’ capital.

 

Russia’s fundamentals far stronger than in 1998…

However, every comparison to the 1998 crisis stops about there. Indeed, while the more than 40% slide in the ruble easily makes it one of the poorest performing currencies this year, its decline pales in comparison to the more than 250% drop that we saw in 1998. Moreover, although Tier 1 Capital Ratios of Russian banks have gradually come down over the past years, Russia’s banking sector is still much better capitalised than in 1998. What is more, Russia’s economic fundamentals are also much healthier. The total economy’s external debt, at around 30% of GDP, is low for emerging countries. Russia’s fiscal situation is also sound, and substantially better than in 1998. While the country is expected to run a small deficit of around 1% next year, this compares favorably to the deficit of more than 5.5% in 1998. As a result, debt levels today, are about a seventh of the levels seen before the 1998 crisis.

…while the CBR can support the ruble, if necessary

But perhaps most importantly, Russia’s central bank has the means to support the ruble. Granted, over the past months, the CBR’s FX reserves have come down somewhat, but at $429bn in October, it has much more ammunition to support its currency than in 1998 when its FX reserves amounted to just $15bn or so. While since the 5th of November, the CBR has greatly reduced its maximum daily FX interventions, moving in essence to a de facto free floating exchange rate, it is important to note that it can still carry out one-off interventions in the case of severe threats to Russia’s financial stability, such as large deposit withdrawals or even bank runs. Obviously, the downside of this would be lower reserves, which could be negative for Russia’s credit standing.

Ruble weakness may have largely run its course

What is the CBR’s new strategy towards the currency? The new framework has the following elements: More exchange rate flexibility, only exceptional currency interventions when needed, higher benchmark official interest rates, and limiting ruble liquidity. Despite the dire growth outlook, the CBR no longer wants to use its reserves. This implies that it must hike interest rates in order to defend its currency. In the near-term, sentiment towards the Russian ruble remains negative and USD/RUB could reach 50 (just below 33 at the start of this year). However, if sanctions are not increased further and the central bank continues to lean against the trend, the ruble should start to regain its footing.