RUSSIA’S finance minister has declared the currency crisis over as the rouble firmed to a three-week high, but President Vladimir Putin told his ministers they would have to work through the coming holidays to manage the country’s deepening economic troubles.
The recent recovery of the rouble — after a major push by the government and central bank to stabilise the market — has eased fears of a spiralling financial crisis. At the same time, the sharp interest-rate increase imposed last week to stem the rouble’s slide, along with widening problems in the banking sector, have darkened the outlook for Russia’s economy dramatically.
Just weeks after dismissing forecasts of a mild recession next year as “too gloomy,” the finance ministry revised its outlook to envision a drop of as much as 4 per cent in GDP next year if oil prices stay around current levels of $US60 per barrel, sapping Russia’s economy along with Western sanctions.
The ministry forecasts that in that scenario, even the 10 per cent across-the-board spending cuts the government is considering wouldn’t be enough to prevent the budget from swinging into deficit, according to the ministry’s documents seen by The Wall Street Journal. With Western financial markets closed, financing the shortfall would force Russia to drain most of its special rainy-day funds, built up when oil prices were high.
Mr Putin, who has been publicly playing down the severity of the economic crisis, drew a parallel to the 2008-2009 crisis and urged the government to step up efforts in solving economic issues in the near term.
“Why do I talk about the near future? Because there are holidays now and they are quite lengthy. And people have a right to rest … But for the government, for your departments, we can’t afford such long holidays, at least this year,” Mr Putin said.
If the finance ministry uncorks the reserve fund, it would further dent the country’s international reserves, which slipped below $US400 billion for the first time since 2009 this week.
Moscow needs it international reserves, still the world’s fourth largest, to cushion a drop in the rouble and plug gaps in the budget. This month Russia has spent as much as $US11.2 billion to ease pressure on its currency, which hit its record low of 80.1 against the dollar last week but has pared some of its losses since then.
After losing around 50 per cent of its value against the dollar in the previous week, the rouble has been strengthening for the past five trading days as prices for oil stabilised and month-end tax payments came due.
“We think that now this period has come to an end, the period of instability. We think that the rouble is still undervalued at the current price of oil,” said Finance Minister Anton Siluanov, according to Russian news agencies.
The rouble gained around 1 per cent to 52.9 versus the U.S. dollar in thin trade yesterday as exporters converted their dollar holdings to roubles to meet local tax payments due by the end of the month.
However, trading was quiet with most major markets closed for Christmas and ahead of Russia’s long New Year holidays.
The rouble’s recovery this week was steered by the government’s order that major state companies sell foreign currencies, which applies to big exporters including Gazprom and Rosneft. Within the next two months, the companies will need to cut their foreign currency holdings to levels of early October, which will fulfil the market demand for dollars and euros needed to repay foreign debt.
After Western sanctions closed the door for borrowing abroad for Russian firms, the central bank and export-focused companies became the only source of foreign liquidity on the market.
The currency order became a part of a package of financial-stabilisation measures that the government and central bank have imposed after last week’s crisis.
The central bank’s unexpected decision to jack up the key interest rate by 6.5 percentage points to 17 per cent early last week has helped the rouble by making a game against the Russian currency more expensive. But the central bank’s rate increase sent interbank overnight lending rates toward 25 per cent from around 11 per cent earlier this month. This sparked wide-scale criticism of the central bank’s policy among businesses.
Mr Siluanov said there is no need to keep rates at high levels for long and that the rates will go down once inflation subsides. This year, consumer inflation is on track to reach 11.5 per cent, he said, its highest since 2008.
Economy Minister Alexei Ulyukayev said yesterday he hopes conditions would allow rate cuts as soon as the first quarter of 2015, Interfax news agency reported.
In addition to low trading volumes and fragile oil prices, the rouble’s recovery will also likely be constrained by Standard & Poor’s warning that it may cut Russia’s credit rating to below investment grade as soon as January.
ING said in a note that the rouble is at risk from investors converting companies’ dividend payments into hard currencies, plus the crisis in eastern Ukraine.