The ruble is reacting as it should, because the exchange rate of the national currency is still an indicator of what is happening in the economy and what risks await it. It is very important to consider the current moment: the Russian economy has actually entered a recession. When current geopolitical risks are added to this, the flight from the ruble will only increase.
First, investment in fixed capital, which began the year with a crash decline (minus 7% in January 2014 year-on-year), will continue to fall due to uncertainty in the economic situation. This uncertainty has increased dramatically recently, and companies are already freezing investments and increasing their foreign currency deposits. As we know, in January 2014 alone, corporate foreign currency deposits grew by $12 billion, while for the whole of 2013 they grew by $23 billion. And in January, there were not yet the incredibly increased risks that exist today.
Second, businesses increasingly lack funds not only for development but also for maintaining current operations. The Bank of Russia, forced to raise its key rate by 1.5 percentage points to 7% in order to somehow calm the panic in the currency market on March 3, 2014, has severely limited the lending capacity of both the financial and real sectors of the economy.
Third, a significant amount of budget money will go to the 'Crimean campaign,' which means that the government's own budget capacity to support the economy, which is already shrinking, will become even smaller.
It is obvious – for those who can still look at this objectively – that the Bank of Russia does not have enough reserves to support the ruble.
Let's look at the dynamics of our international (formerly gold and foreign exchange) reserves: as of January 3, 2014, they amounted to $510.5 billion, and as of February 28, 2014, they were already $493.3 billion. Result: in two months, our currency reserves shrank by $17.2 billion. Then the most acute phase of the Ukrainian crisis began, and the 'Crimean scenario' began to unfold, the results of which are still difficult to assess at the moment. However, it is clear that they will be catastrophically bad. On just one day, March 3, 2014, the Bank of Russia spent $11.3 billion to support the ruble exchange rate.
Someone will say that the Bank of Russia still has a lot of money. Let's evaluate that too. Actually, in this total amount of reserves, there are also the money of the Reserve Fund and the National Welfare Fund – $87.3 billion in each fund as of March 1, 2014.
If anyone still thinks that we have separate international reserves of the Central Bank and the money of the mentioned funds, they are deeply mistaken. This is money in two forms, as it were. Naturally, they cannot be used to support the ruble.
Subtract this money and we get a figure of about $300 billion. Now let's also remember how quickly funds from international reserves can be spent. With the onset of the first wave of the economic crisis in the second half of 2008, international reserves lost nearly $200 billion in just a few months. And we are already entering the second wave of the crisis, and Russia's position this time is aggravated by the Ukrainian events.
The conclusion is obvious: despite the apparent magnitude of international reserves, they will last for a period of several months to 1.5–2 years. It all depends on how soon the Bank of Russia will be forced to abandon large-scale foreign exchange interventions to maintain at least a relatively smooth decline in the ruble exchange rate.
That is why the ruble is weakening. We have not yet taken into account, for example, the fact that servicing the government debt also requires keeping a significant portion of international reserves intact.
But that is not all. Today, a discussion is actively underway about the imposition of economic sanctions against Russia. Some non-economic sanctions are already being introduced – for example, visa restrictions.
Economic sanctions are a separate big issue, so we will not consider it specifically here. Although I will note: the position 'they will suffer more themselves' seems not entirely justified, and all this is proved quite easily with numbers.
It is equally naive to express sentiments like 'to hell with Europe, we will now trade with China and India.' When I first heard this not very original opinion, I immediately remembered an unpleasant character from the cartoon 'Mowgli' based on Rudyard Kipling's book of the same name – the jackal Tabaqui. Remember his song: 'And we will go to the North! And we will go to the North! When we come back, there will be no one. Not even the Little Frog, and his bones...'
Listen, where will we go? Did we ask the Chinese if they need us with our oil and gas in such volumes? Maybe they won't refuse completely, but at a completely different price.
For your information: the US share in China's exports is 17.2%, the EU share is 17.9%, Russia's share is 1.9%. It seems to us that we are a large sales market for them. In reality, it is not so. Who do you think China considers and will consider as strategically important partners under such circumstances?
But the point is not even whether economic sanctions will ultimately be imposed against Russia and to what extent. But it is certain that Russia's actions are powerfully stimulating the West to move away from energy dependence on Russia. Simply put, Europe will try to buy less and less Russian oil and gas.
Honestly, the economic costs of possible sanctions will seem like 'small potatoes' compared to the huge losses that Russia will suffer as the West's energy dependence weakens.
Practical work on moving away from energy dependence was already underway in the US and Europe, and now even more so. So far, the first LNG terminal outside Alaska is only being built, but since 2011, six permits for the construction of such terminals have been issued in the US. Moreover, about 20 corresponding applications are under consideration.
The United States will most likely go ahead with lifting the ban on free oil exports, imposed in 1973. Now, not only the “shale prospects” but also geopolitics are conducive to this.
In turn, Europe is actively building infrastructure for receiving LNG. The most striking example is Poland, with the completion of a large LNG terminal with a capacity of 5 billion cubic meters of gas as early as 2014. What this means for the Russian ruble, whose value depends heavily on global energy prices, is clear.
That is why the ruble does not look like a patriot.
Igor NIKOLAEV, Director
of the Institute for Strategic Analysis of FBK.