Rouble joins Russia's pointers to decline
By Robert M Cutler
MONTREAL - The political future of the Russian administration has become an
implicit question mark as the fall in the price of oil drags the value of the
rouble down with it.
The currencies of countries that are heavily dependant on producing natural
resources are always affected by a falloff in demand for those commodities
because it weakens their own economies even more than others. Thus the rouble
has fallen to nearly the level it held two-and-a-half years ago, almost 28 to
the dollar, as the Russian central bank has begun to allow the rouble to
depreciate.
The citizens of the country have implicitly accepted a curtailment
of their liberties over the past decade in exchange for some economic
improvement (although conditions in the provinces away from the major cities
remain always difficult).
There may be no popular revolt, but a shrinking economic pie imposes hardship
on the oligarchs and their state, and on the urbanized social strata that had
until recently handsomely profited from the rise in the Russian stock market.
Today, however, the principal indices of the RTS and MICEX exchanges are both
down by three quarters from their highs just six months ago. Consumer spending
is growing much more slowly, and the country's industrial production looks
ready to decline as a slowdown proliferates in the construction sector, with
knock-on effects for electricity demand. Production in the metals and mining
sector is already down by half.
Comparable national equities markets, heavy in natural resources and banking,
are Canada and Australia. Their currencies have also been hit by the collapse
of marginal demand for primary materials; yet Canada's S&P/TSX index, by
contrast, is down by "only" slightly more than 50% since its all-time high also
in May, while the Australia All Ordinaries Index slightly less than that.
Of Russia's major stock benchmarks, the RTS index has now fallen to 618 and the
MICEX index to 580, respectively about 7% and 3% below the tops of the bands of
technical support that I identified a little less than three months ago (see
Russian equity flight accelerates, Asia Times Online, September 11,
2008), as defined by their charts in 2004-2005 but still within those bands.
(For more background, see
Georgia invasion worsens Russian downturn, Asia Times Online, August
22, 2008.)
Responding to this fall in Russian equities as well as to the depreciation of
the rouble, private banks as well as individuals have been seeking to send
their capital out of the country and otherwise convert it into foreign
currencies. These flows further decrease demand for the rouble, and as that
occurs, so also, following the law of supply and demand, the value of the
rouble continues to decline.
Trying to sustain the falling currency against a too-rapid depreciation, the
Russian central bank has slowly widened its permitted trading band against its
dollar/euro (55-45 weighted) benchmark twice in a week and three times in a
month. To support the rouble against a catastrophic decline, it has foreign
exchange reserves of about US$450 billion - the world's third-largest,
according to Bloomberg; but it is not clear that expending even these sums
would be sufficient, let alone advisable. In August, those reserves were $600
billion, so it has since then spent a quarter of that sum merely to restrain
the decline of the rouble to a 16% slide.
Western financial commentators are already suggesting that the central bank
should widen the trading band of the rouble, that is, allow it to depreciate
faster. Goldman Sachs estimates that it may be desirable for the rouble to fall
steadily another 18% over the next three quarters. Bloomberg News quotes a
strategist at Moscow's Alfa Bank as saying that market behavior indicates an
expectation of a decline of between 15% and 20% from the present level.
Just as central bank intervention has been required until now so as to put
brakes on the recent decline, so it would still be required to prevent a
further decline from snowballing into a massive devaluation. Both Russian and
European financial services, however, are warning that the Russian central bank
could end up spending reserves with nothing to show for it. They estimate that
a snowball is inevitable and the devaluation could reach 30%, attained in one
or more big drops rather than small progressive declines, whether the central
bank intervenes in the short term or not.
As for oil production in Russia, this continues to grow but less dramatically
than before, such that the rate of growth itself has turned negative.
Meanwhile, the Yukos affair (state expropriation of the company following
highly disputed criminal charges against its owner Mikhail Khodorkovsky) and
the BP-TNK affair (effective nationalization of a joint venture by slow
judicial procedure) have done nothing to encourage foreign investment.
On the domestic-investment side, exploration for new resources has stagnated.
Much of the recovery of production levels during the present decade has come
from old fields that were "mothballed" in the 1990s. It is unclear that even a
return of the price of oil to US$80 per barrel would benefit Russia in the long
run. Oil has plunged 67% from a record $147.27 a barrel in early July.
Russia has stated that it will not join the Organization of Petroleum Exporting
Countries (OPEC) but may cooperate with it in order to ensure stable prices.
Yet OPEC has decided to put off for several weeks any decision on production
cutbacks for price support. Since OPEC members tend more and more to see Russia
as a free rider, that may be because leading oil producer Saudi Arabia, which
often takes the brunt of reductions in output, no longer wishes to do so, or at
least to do so alone.
Already in Russia, and increasingly in the world at large, the falling price of
oil diminishes incentives for capital investment in future production, beyond
the financing and debt problems separately evident from the global financial
crisis. This actually sets the stage for the possibility of an explosive spike
later, as demand returns to levels supply is unable to match.
However, even if that comes to pass, it may then be too late for the Kremlin
and Russia's currency. Under conditions of increasing economic hardship all
around, Russia looks to be on the road to a still more authoritarian state.
With even regime-friendly political dissidence effectively eliminated from the
public airwaves and print media, it is difficult to see how the citizenry might
organize itself so as to oppose such a trend.
The chances for real democracy in Russia appear to have died with the
still-unsolved murder of the reformer Galina Starovoitova (who would probably
have stood for election as president) in her St Petersburg apartment building
10 years ago.
The current oligarchs, whose fortunes are in metals, energy and banking, have
learned the lessons of the past and do not challenge the power of those who
wield the state's (relative) monopoly on the means of physical coercion. At the
same time, public statements notwithstanding, they hardly seek to absorb by
themselves the brunt of the fiscal and financial consequences of the present
downturn.
In the current political constellation in the Kremlin, it is hard to escape the
parallel, that President Dmitry Medvedev is increasingly looking like playing
Aleksei Kosygin to Premier Vladimir Putin's Leonid Brezhnev. When Nikita
Khrushchev was deposed by the Communist Party's Central Committee in 1964,
Kosygin became prime minister while Brezhnev was installed as the party's
general secretary. The new regime was denoted by linking the two together, much
as Lenin and Trotsky almost were a hyphenated single name before Josef Stalin's
ascendance.
The "Brezhnev regime" properly speaking actually dates only from 1973, when the
heads of the KGB, the armed forces and the Foreign Ministry were co-opted into
full Politburo membership. This event, presaged by Brezhnev's dominance of the
preceding Communist Party general congress in 1971, represented the compromise
and consolidation of the "power ministries" around Brezhnev as head of the
party.
By the early 1970s, the reform-minded Kosygin had been politically shunted
aside, although he continued to occupy his formal government post. Medvedev,
although a post-Soviet rather than a Soviet technocrat, had no real political
experience before becoming president. His election represented only the defeat
of the Kremlin faction that, for its own reasons, at all costs never wanted
Putin to leave power.
Yet there is no guarantee that even Putin's return to the presidency, a
possibility widely bruited in light of a constitutional amendment now
permitting this, would resolve the matter. Indeed, such a development would
likely upset the balance that political forces around the Kremlin have been
attempting to re-establish since his departure from the office. So long as the
present oligarchs continue to receive the support of the state in return for
their support of the state, the rouble's situation will not change for the
better any time soon.
Robert M Cutler(http://www.robertcutler.org) is a Canadian
international affairs specialist.
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