Weekend Economists Silent Night Christmas Eve 2014

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30. How Putin Stopped the Ruble's Collapse

http://www.bloombergview.com/articles/2014-12-23/how-putin-stopped-the-rubles-collapse

The Russian ruble, which last week briefly became the world's worst-performing currency, is rebounding, as is the battered Russian stock market. That doesn't mean President Vladimir Putin's economic team has managed to fully stabilize the currency or resolve any of the underlying problems that led to its recent plunge.

At first glance, the ruble and Russian stocks are doing well: They have recouped their losses faster than the oil price, which has merely stopped falling in recent days:

The current rate of less than 55 per U.S. dollar seems miraculous after last week's "Black Tuesday," which saw the ruble almost reach 80 per U.S. dollar. That decline followed a surprise decision by the Russian Central Bank to increase its key lending rate 6.5 percentage points to 17 percent, and it appeared the monetary authorities could do nothing short of introducing currency controls to halt the rout.

Nigeria's oil currency, the naira, is only down 4 percent against the dollar in the last 30 days, unlike the ruble, which lost almost 37 percent at its lowest point. Yet the African country's central bank has not been shy to impose a mild version of currency controls. It has banned local lenders from holding open forex positions overnight and required them to use purchased foreign currency within 48 hours, or sell it to regulator.

Russia has so far avoided introducing the kinds of measures, such as a moratorium on foreign debt repayment and an order to trade in 100 percent of foreign revenues for rubles, that were applied after its domestic debt default in 1998. Instead, the government is demonstrating the broad formal and informal control over the Russian economy it has acquired during Putin's rule.

The government is working through the boards of directors of state-controlled companies to give them until March 2015 to reduce the balances in their hard currency accounts to the level of October 1, 2014. Private companies are being told to do the same or face the Kremlin's ire -- a suggestion that can be as effective as a direct order in a country that has no real private property guarantees. Swissquote, an online bank, estimates that the requirement means a gradual sell-off of $50 billion, sparing the central bank the need to deplete its international reserves to hold up the ruble. Besides, one more company selling hard currency is one less player betting on the ruble's further decline.

So far, the tactic is working, even though there's been no sudden change in dollar and euro trading volumes on the Moscow Exchange. Short-sellers have become hesitant to bet against the ruble, knowing that some big foreign currency sales are coming...

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