Tuesday, December 23, 2014

Wither the Ruble?

Did I mean to say "Whither the Ruble?"  No.  I am commenting on last week's jumping up and down over the 17% decline of the Russian ruble last Tuesday, led most loudly by Paul Krugman on how Putin's "bubble burst."  By the end of the week the ruble was only down  by 2% and rose again today, although this did not make the news that the commentary on how the ruble was done for and Putin was clearly paying the price for his sins (although, of course, it is the Russian people who are going to pay the price next year and possibly longer of the upcoming recession).

Quite aside from the obvious lack of further withering after last Tuesday's apparent meltdown, there are reasons to be somewhat cautious about predicting further major collapsing, although it certainly cannot be ruled out.  One ironically is a side effect of the economic sanctions and the Russian reaction to them, with the sanctions certainly having contributed substantially to last week's decline.  Imports into Russia have been sharply reduced, so that despite a major decline in oil export revenues as oil prices decline, the current account of Russia is in surplus and likely to remain so for the near future.

Another is that Putin went out of his way to largely eliminate Russian sovereign foreign debt, with the central bank still holding about $370 billion in foreign exchange reserves, although maybe as much as $100 billion of that is tied up in various ways making it all but unusable.  Where there is a Russian foreign debt problem is in the Russian private sector, with many Russian companies having run up foreign debt that must be refinanced next year.  This could be a big problem, if sanctions remain in place.  This is where the sanctions bite, and if the ruble were to resume falling seriously, would aggravate their refi problem.  Indeed, contemplation of this was a major part of Krugman's discussion, particularly another post on Russian foreign debt, which has been holding steady at about 35% of GDP, most of this private debt. 

Obviously, the main fundamental driving down the ruble has been the falling price of oil.  This could easily go lower and probably will, with the Saudis holding production steady and even stating that they could handle a $20 per barrel price.  They probably could, as the world's lowest cost producer.  But if oil hits such a price, it will not stay there long, and indeed bottomed out in the low 30s near the end of 2008 after the collapse of the then oil price bubble.  This one does not look so much like the collapse of a bubble as a basic supply and demand adjustment: demand has been weak and supply has increased from various sources.  The Saudis have decided to let the price fall enough to drive out the high cost producers, some of them in the US, and then the price will go back up, if not necessarily to where it used to be.  Indeed, some observers argue that oil is already oversold and could go back up to around $70 per barrel fairly soon, as part of the decline was due to technical trading, basically a downward bubble that may have finished. If this bounce happens, there will not be all that much more withering of the ruble.

Let me be clear that I am not at all applauding Putin, whom I despise, and obviously he could substantially improve the situation there if he stopped messing in eastern Ukraine and got the economic sanctions removed.  However, he seems to have sold the Russian people on suffering economic privation for these foreign escapades, at least for now, invoking WW II with charges of "fascism" in the Ukrainian government and "aggression"by NATO, these given some support by there actually being loudmouthed extreme nationalists in the Ukrainian government and the Kerry State Department having stupidly put the loudmouthed neocon, Victoria Nuland, into a senior position.  I know very knowledgeable and intelligent people in Moscow who are buying Putin's tripe.

As it is, I agree with Krugman that Putin's activities are indeed showing that "conquest is for losers," even if Putin can continue to con his own people on this for awhile longer.  In the immediate moment my biggest sympathy goes to Russia's central bank governor, Elvira Niubilla, who was pressued into helping finance a shady Rosneft deal, probably the immediate trigger of last Tuesday's collapse, and whom Putin has denounced for not stopping the decline.  Former central banker Victor Gerashenko has said that if he were in her position, he would "get a gun and shoot myself."  Sigh.

Barkley Rosser


Peter Dorman said...

Barkley, Russia's private external debt is interesting. Normally a surplus country, by the magic of accounting identities, also has limited domestic debts: domestic borrowers can tap domestic savings -- e.g. Japan. But Russia looks like a special case.

Can we simply infer that there is massive, ongoing capital expatriation taking place? Cyprus, London real estate, etc.? Is this the kleptocracy exception to the standard surplus country model? Does it render Russia more vulnerable than it would otherwise be?

But if the answer to these questions is yes, how do we explain the willingness of Putin to permit such behavior on the part of those to whom he has bestowed such favors? Or does the flow of political causality run from the oligarchs to Putin and not the other way around?

Inquiring minds beseech an answer.

rosserjb@jmu.edu said...


Russia is certainly a very special case. The obvious thing for Putin to do would be to impose capital controls, as Belarus has just done. But Putin has been resisting this, and most observers think that indeed it is because of wanting to keep his cronies happy.

What is really up in the air is how much this actually has to do with Vladdie himself. After all, the new book by Dawisha claims his personal wealth is in the neighborhood of US $0 billion,which if correct would make him one of the four or five wealthiest individuals in the whole world, far beyond the penny ante billionaires he is either helping or throwing in jail arbitrarily.

rosserjb@jmu.edu said...

That should have read "US $40 billion." A lot of money, even if it is exaggerated several fold.

Don Coffin said...

Barkley--Off-topic here, but I completely agree with your response to Rob Tye on the SHOE listserv...I couldn't believe anyone could spout such nonsense in public, with an audience which surely knows enough to know how off-base he is.

rosserjb@jmu.edu said...


The guy is seriously obsessed with several figures, all of whom are mentoined in his post, with Wittgenstein, Keynes, and Bertrand Russell at the top of the list. He bombarded with private messages about all this, and it is very bizarre, but this stuff on Braudel is just absurd.