Last year, Russia was all the rage meme absurd and poorly written in which two cats were attentively observing a street stall.
—Do you sell fish?—, they asked the human.
“No, I’m just showing it off,” the fishmonger replied.
—Precious—, concluded the felines.
Something similar happens with the ruble. The posters of Russian bank prices have shown a stronger currency even than before the war with Ukraine, but behind that facade it was impossible to buy foreign currency with rubles, operate on the Moscow Stock Exchange or pay for imports that many companies need. If the economy has resisted until now, in the face of the avalanche of sanctions for the Ukraine war, it has been thanks to the actions of the central bank, which has managed to save the furniture by inducing a temporary coma. But decisive months are coming and some measures cannot be extended any longer. The savings and purchasing power of Russians is at stake.
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“What will the exchange rate of the ruble be is the question that worries almost all Russians,” says the investment fund Ingosstraj-Investitsi in a recent analysis of the mini playpen tax in the country. This is also the key issue for many businesses. Beyond the supposed solidarity with the attacked Ukraine, numerous foreign companies have suspended their activity in Russia while waiting to better calculate how much the exchange rate will be and if it will compensate to raise prices so much -or not-, says an employee of a Spanish firm in Russia.
The Russian central bank, led by Elvira Nabiúllina, has now begun a controlled blasting of all the restrictions it imposed at the beginning of the war last February to prevent a massive flight of capital from the country. Starting this Monday, citizens will be able to buy euros and dollars again at exchange houses and banks. Of course, these will only be able to sell the currencies that have entered since April 9, with exports already sunk (and therefore less income from foreign bills), so at first it will have a limited impact.
The Russian currency closed on Friday on the Moscow Stock Exchange at 85.4 rubles per euro, when at the beginning of the war it shot up to 160. However, inflation has not followed in the wake of the official value of the ruble and, after a dizzying rise, not yet come down. According to data from the central bank, the rise in prices has been generalized both in food —with an increase of 18% compared to March 2021—, and in non-food products —with an increase of 20% year-on-year—, especially due to the initial increase in the price of imported appliances, vehicles and other technological products. Furthermore, many of these goods and services are actually inaccessible, having been temporarily removed from the market by their manufacturers.
The mattress is small for Russians. According to the state sociological research center Vtsiom, 42% of citizens do not have any savings, while 30% have some money in deposits, 14% have it abroad, and 18% keep their cash at good collection at home.
Nobel Laureate in Economics Paul Krugman’s article ‘Why Russia Defends the Ruble’, published on April 1 in The New York Times, was highly cited by Russian investment analysts. Krugman speculated, “without direct evidence”, that this overprotection of the currency over any other real economic objective is only for political purposes: “If the Russian economy deteriorates as much as expected in the near future, its muzzled press will simply deny it. . However, what he will not be able to refute is a drastically depreciated ruble. So defending the ruble, regardless of the real economy, makes sense within the propaganda strategy”, the economist stressed.
Restrictions in defense of the ruble
To defend the ruble, all kinds of restrictions have been approved. One of the first was to prohibit banks and exchange houses from selling foreign currency to the population. Likewise, deposits in foreign currencies (popular in Russia in the face of the historical lurching of the ruble) were imposed a limit of 10,000 dollars to withdraw the money, and from there it is changed to rubles. Regarding companies, all businesses that earn foreign currency automatically exchange 80% of their income for rubles, while those brokers of the Moscow Stock Exchange have been prohibited from selling the shares held by foreigners.
In addition, people who have to send transfers abroad, such as separated families, encounter various problems. Only a few Russian banks are sanction-free and allow money to be sent out; Visa and MasterCard left the country, so making payments abroad is an impossible mission; and if in the end the remittance is sent, it is likely that the financial institution will block it until its origin is verified, as is happening with Spanish-Russian couples in Spain. One of the few financial entities not sanctioned by the West is Tinkoff, whose owner has been highly critical of Putin’s war.
On the other hand, the ruble has withstood the challenge these first two months of war thanks to the “cushion” that Moscow had for emergencies and two “back doors” to avoid sanctions, although they are already being closed. The central bank had a fund of 640,000 million dollars (about 592,000 million euros), of which half has been frozen by the West, 17% is in Chinese yuan and another 21.5% is invested in gold, although few countries risk buying it for fear of sanctions.
On the other hand, Moscow has so far clung to payments from European countries that continue to buy gas, and to a special concession from the United States Treasury for Russia to pay the sovereign debt that has expired these months with the funds it has frozen abroad. . This permit will end in May, while the European Union is on track to cut two-thirds of its gas imports this year.
Krugman’s economic theses were shared on his Telegram channel by Sergei Vasiliev, representative of the board of directors of the Russkie Fondy investment company. The expert, “leaving his arguments about totalitarian regimes in Krugman’s conscience”, agreed that there is an “impossible trinity” that every country seeks for its currency: maintain stability with respect to other currencies; allow the free flow of capital across the border —these first two to generate confidence in business—; and control monetary policy to lower rates in recessions and raise them against inflation. According to economists, the countries only have in their hands to choose two of the three pillars that make up this trinity.
For example, members of the European Union have ceded their monetary policy to the ECB while China restricts its capital flows—and thus the yuan is not a substitute for the dollar, according to Krugman. However, both Russian experts and the Nobel Prize winner emphasize that Moscow has chosen to adopt a single pillar in this crisis: maintain the parity of the ruble at the cost of implementing a playpen and raise interest rates in the face of an impending recession.
The central bank raised rates from 9.5% to 20% in February to discourage the withdrawal of rubles from deposits, but this is unfeasible in the long term for financial institutions to grant loans in the midst of a collapse in production or for citizens to ask for mortgages and consumer loans. Its recent cut to 17% caused a slight devaluation of the ruble.
On the other hand, “in February, when those well-known events occurred, capital control measures were introduced,” recalls Ingosstraj-Investitsi. The fund warns that these measures “are not used in market economies because they reduce the attractiveness for investment in the country and their effectiveness is doubtful: when the outflow of capital is limited, the incentives for its entry are reduced.”
President Vladimir Putin assured last week that his country “cannot be isolated” by sanctions. However, more and more companies are leaving Russia due to uncertainty. Some have only suspended their activity to avoid losing their business, such as McDonald’s, Nike or Zara, but they could soon have problems. Putin’s party has just presented a bill in the State Duma that will allow those “important” foreign companies that have completely ceased their activity to be transferred to an external manager.
Other companies have decided to transfer ownership of their businesses to third parties in the face of pressure from the West and Ukraine to stop supplying their products to Russia. The first to do so was Reckitt Benckiser, owner of 60% of the local condom market with Durex and Contex, as well as the manufacturer of Strepsils pills and Calgon and Cillit-Bang cleaning products. British Tobacco (Camel and Lucky Strike) has also joined this initiative, and other multinationals under pressure are considering doing the same operation.
It is increasingly difficult to know the real situation of the Russian economy. A new law has exempted companies from paying dividends and making their financial statements public “if their disclosure could lead to the imposition of sanctions against them.” One of the entities receiving these benefits is the sanctioned Sberbank, the largest Russian bank, with more than 100 million customers and a third of all loans in the country. Its hypothetical bailout, like that of the country’s second-largest bank BTV, could deal a serious blow to the ruble, and portfolio managers prefer to be very cautious about its current state. “Shares of the country’s leading bank are no longer a defensive asset, but an experiment,” he says in his Ingosstraj-Investitsi report.
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