The crash in the value of the Russian rouble in the past few weeks is symptomatic of a wider problem. Russia’s finances are being choked.
Data released in Moscow on Tuesday confirms that. Russia, which had a record current account surplus of about $344 billion last year, had a surplus of only about $30 billion in the first half of this year. In the June quarter it was a modest $8 billion. Russia’s central bank has forecast a surplus of about $70 billion this year, which appears somewhat optimistic.
Where last year oil and gas prices were soaring – the oil price shot above $US120 a barrel in the immediate aftermath of Russia’s invasion of Ukraine and gas prices also rocketed as the Europeans scrambled to build their reserves – the European and G7 sanctions on Russian energy that were implemented last December have savaged Russia’s revenues.
Oil and gas revenues, historically providing nearly half the Russian government’s revenue and vital to its ability to fund the war, were down nearly 50 per cent in the first half of this year relative to the same half of 2022. The G7’s $US60 a barrel cap on Russia’s oil exports and the boycotting of Russian gas by most of the European Union members has been surprisingly effective.
To put the heavy losses of income into a contemporary context, Russia’s military budget for this year is equivalent to about $127 billion. In pre-invasion 2021, that budget was about $100 billion.
The loss of energy-related income is the main influence over the shrunken current account surplus but increased imports are also affecting the outcomes.
The increase in import costs probably reflects both the inflationary global environment but also the higher cost of acquiring goods to replace suppliers who cut of dealings with Russia after the invasion and the relatively loose fiscal policies Russia has been running in then post-invasion period.
There are a lot of consumer and industrial goods that Russia doesn’t produce itself and which are subject to sanctions. Sourcing them from third countries would add to their cost.
The deterioration in the trade balance has put the Russian rouble under acute pressure. After being one of the best performers last year, after initially plummeting when the invasion was launched, it has been one of the worst this year, depreciating around 20 per cent. One Russian rouble was worth about 1.4 US cents at the start of the year, it is now worth around 1.1 US cents.
It’s been particularly volatile in recent weeks, with the aborted “March to Moscow” by Yevgeny Prigozhin’s Wagner troops triggering the most recent fall to its lowest levels in 15 months. It’s stabilised this week but is still outside the range of 80 to 90 roubles to the US dollar targeted by Russia’s central bank.
The sanctions and the withdrawal of foreign investors from Russia’s financial markets means the value of the rouble is driven almost entirely by the current account flows, which suggests it might have further to depreciate and raises the prospect that, without intervention, it could feed into an inflationary spiral, although inflation in Russia, after an initial spike last year, has been in the low single digits within a war-affected economy.
The rouble’s value hasn’t been helped by a steady leakage of capital, with a burst of capital flight after the Wagner mutiny, as Russians continue to shift their savings offshore despite the capital controls imposed last year. There’s been an exodus of about $US45 billion since March last year, with a fresh surge after the Wagner revolt.
While Russian officials appear unfussed by the shrinkage in the current account and the depreciation of the rouble they have taken some action.
There’s an across-the-board 10 per cent cut planned for government spending, an expectation that the central bank will raise interest rates and the finance ministry has been selling foreign currency reserves, mainly China’s yuan, to raise cash to supplement the diminished energy revenues and support the currency.
The finance ministry has said it plans to sell foreign currency reserves worth about 35 billion roubles ($660 million) over the next month, after previously announcing it would sell 74.6 billion roubles-worth between June 6 and July 7.
Russia has accumulated significant holdings of China’s yuan and India’s rupees by conducting trade with those countries in their own currencies to avoid having to trade in the US dollars in which commodities trading is usually conducted. (Russia has been booted out of the dollar-dominated SWIFT global messaging system that underpins most global financial transactions and most of its reserves held offshore, which are predominantly in US dollars, frozen).
Despite several attempts by the Saudis and Russia to push oil prices up by reducing production the weakness in the global economy has kept them below $US80 a barrel.
Russia’s oil that is carried by western ships insured by western insurers are subject to the $US60 a barrel cap. While it has assembled a large “gray fleet” of its own, the existence of the cap means buyers can demand discounts to the global price and re-routing its sales from Europe to Asia adds significantly to the costs.
Russia needs higher oil prices for its unsanctioned oil and/or higher volumes of the capped price oil if it is to stabilise its current account and currency and sustain the funding for the war in Ukraine without decimating a domestic economy that has held up surprisingly well and (further?) destabilising the Putin regime in the process.
China’s spluttering economy and the squeeze on developed economy growth being exerted by the higher interest rates imposed to combat inflation, won’t help Russia’s cause.
The rouble, now that it provides a relatively clean insight into the external capital flows of an export-reliant economy, will be a good barometer of Russia’s condition. It’s showing significant pressure.
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Source: Thanks smh.com