Ruble Spirals Elegantly out of Control as Functional Currency

On Wednesday, the frazzled Russian Ministry of Finance tried to get a grip on the currency crisis that is annihilating the ruble by announcing through the Russian news agency Interfax that it began selling its crown jewels, the already dwindling foreign currency reserves, in order to buy rubles. It had an impact, at least for the day.

This came after the utterly desperate Central Bank of Russia announced after midnight Tuesday Moscow time that it increased its benchmark rate by 6.5 percentage points to 17%, after having already jacked up rates last week to 10.5%. It was supposed to put a floor under the plunging ruble.

After the shock-and-awe rate increase, the ruble perked up just one tiny bit. For a few moments there might have been hopes that the unstoppable dive could be stopped, that in fact the central bank had this under control. But then the ruble crashed, hitting 80 rubles to the dollar, down 20% from the peak of the prior trading day, and down 56% since August.

Panicked markets had demolished the central bank’s scheme. After Economy Minister Alexei Ulyukayev denied rampant rumors that the government would impose strict capital controls to stop Russians from dumping their rubles in exchange for dollars or euros, the ruble “recovered,” and it ended Tuesday at 68 rubles to the dollar, down 11% for the day.

On the streets, there were signs that Russians had lost faith in their currency after watching how their incomes and savings got decimated. Bid-ask spreads of 20 rubles began appearing at some exchange offices where they offered to sell dollars for 85 rubles but would only buy them for 65 rubles. IKEA furniture stores and other “hard asset” retailers saw a burst in activity as folks were trying to convert their rubles into whatever else they could before these rubles lost their value entirely, and before retailers could catch up with price changes.

They mobbed online stores for the same reason, going after valuable but easily traded electronics that could be bought with increasingly worthless rubles and sold in the EU for hard currency and a profit. In response, Apple began protecting itself. Rather than admitting that it wouldn’t accept rubles any longer because it wasn’t a functional currency anymore, it just shut down its online store in Russia, as it said, “due to extreme fluctuations in the value of the ruble.”

Automakers including GM, BMW, Audi, and Jaguar Land Rover have halted deliveries of new vehicles to Russian dealerships. Other companies are implementing similar measures.

Everyone wants out of the ruble. They consider it dead. Net capital outflows would more than double this year from last year, to $134 billion, the central bank said last week. But that was before the ruble crisis boiled over. Now capital flight is likely to soar.

Next year, it’s going to be tough. The astronomical interest rates, based on the central bank’s 17% benchmark, will crush lending to households and businesses and will strangle the Russian economy. The 50% plunge of the price of oil since June is already hitting the Russian energy industry, which accounts for about one quarter of Russia’s economic output. This is compounded by the sanctions that have blocked Russian companies from Western capital markets and partnerships with Western companies. Russia’s budget is being put through the wringer. And there will be pain.

The Economy Ministry projected that the economy would shrink 0.8% in 2015. But the central bank said that with oil prices averaging $60 per barrel under a “stress scenario,” the economy could swoon between 4.5% and 4.7%. But these scenarios were hashed out before the panicked shock-and-awe interest rate hike.

As the ruble has spiraled into an out-of-control collapse, global banks and currency brokers are getting cold feet, which could add further pressure on the Russian financial system. A number of them announced they’d halt dollar-ruble trading. Why? FXCM, one of the largest among them, told Reuters that Western banks that provide the liquidity for dollar-ruble trades had stopped quoting prices.

Turns out, the largest banks were restricting some ruble transactions and limiting the flow of cash to Russian entities. Even as such moves have become “increasingly widespread,” according to the Wall Street Journal, banks themselves were still trying to profit from the ferocious moves of the ruble:

Such banks as Goldman Sachs Group Inc. this week started rejecting requests from institutional clients to engage in certain ruble-denominated repurchase agreements and other transactions designed to raise cash, according to people familiar with the matter.

The dollar-denominated RTS index of Russian stocks plunged 12% on Tuesday, the worst day since financial-crisis year 2008. It has lost about one-third of its value this month. The largest banks, which are in the middle of this crisis, face systemic risks, corroding loans, deposit outflows, and less demand for their services. Since early July, the RTS index lost 55%.

The stock market in the US, after some initial squiggles, soared on Tuesday, blindly plowing through whatever reality might be in its way. But then at 11:30 AM, suddenly spooked, the rally turned into a nasty sell-off. In those final hours, the S&P 500 plunged 41 points and the Nasdaq nearly 100 points, both down 2% in half a day. It was the sixth day of declines in seven days.

That was Tuesday. On Wednesday, the Finance Ministry tried to re-exert control and manipulate the ruble back to life, at least for a little while, with the announcement that it has begun selling its crown jewels in order to buy rubles. It might be the only motivated ruble buyer of rubles, but hey. On cue, the RTS index soared 15%, regaining what it had lost the prior day. The ruble jumped too. And as I’m writing this, US stocks are soaring. All is well.

But it hasn’t changed the underlying dynamics for Russia: a bevy of sanctions, an economy dependent on oil whose price has plunged by half in six months, a fiat currency that – in a world where everything is manipulated and controlled – is spiraling out of control. Russia is the ninth largest economy, a hair behind Brazil and Italy. It’s facing a currency crisis, an economic crisis, and a banking crisis. And the world’s biggest banks face a potential derivatives crisis if the ruble and Russian bonds blow up entirely. Hence the whiff of chaos.

The plunge in the price of oil has caused Wall Street to promise a big boost to US GDP. But what have these folks been smoking? Read…   This Is Why the Oil-Price Crash Will Maul the US Economy

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  13 comments for “Ruble Spirals Elegantly out of Control as Functional Currency

  1. Julian the Apostate
    Dec 17, 2014 at 10:36 am

    The first domino?

  2. Paulo
    Dec 17, 2014 at 10:38 am

    This smells like a prelude to a shooting war. Putin won’t roll over or bend over. I don’t think it is wise to paint him too deep into the corner without some options other than striking back.

    • Allan
      Dec 17, 2014 at 8:04 pm

      I’m not being confrontational here… what are his viable options as far as striking back?

      • Bo
        Dec 18, 2014 at 1:56 am

        I’m no expert, but I’ve read some experts say that they fear Russia will try to extend their land grab. Probably not the Baltic countries, but I’m pretty sure some of the smaller countries around Russia that aren’t in NATO are chewing their fingernails right now.

        • Alex
          Dec 19, 2014 at 8:15 am

          Not true. Why would Russia need those small countries? There is absolutely no reason to acquire these burdens. All those “fears” are manufactured by small countries themselves since governments there are very pro-western and are heavily bribed by the West. Take a close look at what happened to Baltic States for instance. Their economies practically do not exist anymore and this is a price to pay for joining EU. Locals are very angry but who listens to them? Definitely not their goverments (Latvia’s President for example is a foreighner and could not even speak the language!!!). So obviously such governments need to spread the rumours about some mythical threats from Russia so they would get their behinds covered in case of locals uprising.

    • Alex
      Dec 19, 2014 at 8:29 am

      No one is in the corner Paulo. This is totally invented and does not correspond with reality. Putin does not need any options because he knows that the real issue here is a collapsing financial system of the West. Russia is not related to this problem in any way since western countries debts were acquired without its participation. So no matter what, Russia is going to be used as a scapegoat in order to distract the population from the real issue. It is obvious to him (as well as many others) that financial system cannot be dominated by the single currency, this is simply too dangerous for the rest of the world, so this is why a new system, built on multiple currencies is being built and guess who doesn’t like it – absolutely correct, the ones that issue absolutely fake sanctions. There is nothing else to this story, and no matter what blaming of Russia will go on until indebted western countries will find an acceptable solution for themselves. They do not understand yet how would they fit into new system and what to do with their unpayble debts but there would be a resolution at some point in time.

  3. Vespa P200E
    Dec 17, 2014 at 10:41 am

    Be careful what you wish for Obozo and spineless EU minions as covert efforts to undermine Putin who has some real “balls” is like cornering a rat who may just bite you, hard.

    History has shown over and over again that currency and trade wars lead to real wars and cornered “leaders” like Putin may act irrationally with what he has AKA Russian armed forces while whipping up Russian resentment against the West and calling for another “Patriotic” war.

    Historians say 1 of the main cause of Pearl Harbor was due to US oil embargo as believe it or not USA was the biggest oil exporter in the 30’s. US also made sure the allies didn’t sell oil to Japan and thus Japan also attached Dutch East Indies for the oil booty.

  4. Dec 17, 2014 at 11:28 am

    The first domino was Abenomics …

    Actually the first domino fell along time ago, in 1973 with the first oil crisis. The establishment has been busy propping key dominoes ever since.

    Reaganomics-‘Voodoo Economics’ was a prop, finance market asset bubbles were all props, offshoring US jobs and importing Mexicans was a prop so was introduction of the euro; all were energy price hedges and all have proven over time to be worse than ineffective. The market really does not have a painless solution to petroleum and other resource (capital) squander except bank- and currency runs/crashes.

    For real this time: it’s on like Donkey Kong …

  5. SaveUs
    Dec 17, 2014 at 7:14 pm

    Re: Ikea furniture stores and other “hard asset” retailers saw a burst in activity …… They mobbed online stores for the same reason going after valuable electronics that could be bought with increasingly worthless rubles and sold in the EU for hard currency….

    So the Russians are driving and or flying to Europe to flog their newly purchased Ikea furniture and electronics on EU street corners. OH please…..

    • Dec 17, 2014 at 8:26 pm

      Not furniture. But electronic gadgets, smartphones, etc. There’s a thriving market for them.

  6. posa
    Dec 17, 2014 at 8:07 pm

    The pressure’s on Putin… he’ll come out of this either the lion or goat of history. He can keep playing the Western game and listen to some girls with MIT diplomas running the Central Bank and economics ministry.

    Or he can go on a war footing and listen to Sergei Glazeyev.

    That means capital controls (implemented fast) and debt moratoria (even repudiation) are strong cards the Russians have to play. From that point on it’s back to autarky and closer integration with BRICS and other developing nations. It will be rough but the Russians have survived worse.
    It’s reported that The oligarchs are completely tamed at this point. This is war- economic war.

    As noted, Debt repudiation could have nasty effects on EUSA banks and corporations… Personally, I have the feeling that Putin will pla it safe and go down in flames playing the MIT- recommended game. It’s his funeral.

  7. Julian the Apostate
    Dec 19, 2014 at 6:43 am

    He has another option. Zero Hedge said this morning that he bought another 600,000 ozs of gold. A gold backed rulple would channel a good deal of flight capital into his coffers. Of course, in this climate about ‘barbarous relics’ that would really take balls.

  8. Alex
    Dec 19, 2014 at 7:57 am

    What a funny story :) No one is desperate anymore in Russia and the show is over (and today is 19-th of December!!!). Central Bank effectively took control of this situation and as the result the dollar is below 60 roubles, stores reduced prices by 10%-15%, banks got their punishment (CB made rouble vey expensive and now they are scratching their heads), euro is just above 70 roubles (down from 150), CB installed its reps in banks to overlook (and take under full control if nesessary) banks activities in currencies markets (deviation of 3.5% from the norm allows reps to halt bank’s currencies trade), and so on. It is a good thing to remember here that Russia’s debt represents only 12% of GDP (compare it to data from most developed countries) so its currency is rather undervalued and is in a very good standing.

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