Russia suffered more than other leading emerging countries from this sudden
outflow given its heavy dependence on oil and other commodities. The
economic crisis and the sharp fall in commodities prices unsettled the
Russian resource-based economy and sent its currency, the rouble, into a
tailspin. Moscow was tempted to reintroduce its old capital controls to stem
the flight of capital – $130bn in 2008 alone – and prevent the rouble from
devaluing further. But it ultimately stopped short of doing so.
Today, some policymakers in Moscow are once again suggesting that the time may
have come to bring back capital controls. Not so much because the rouble is
under attack – quite the opposite. Indeed, foreign investors seem to be
gleefully buying the rouble and sending the Russian currency to its highest
level against the euro in 14 months
Risk-hungry
This is perfectly understandable. Oil prices have been recovering and are now
trading on average at more than $80 a barrel, while the Greek crisis and the
imminent British elections have undermined the euro and sterling. Coupled
with near-zero interest rates in the US, the UK and the eurozone compared
with Russian yields of about 8.5 per cent, it is not surprising that the
more risk-hungry investors are buying into roubles.
The Russian central bank is unhappy, as indeed are the country’s big exporters
of oil and other dollar-denominated natural resources. The recent
appreciation of the rouble is not only likely to complicate Russia’s
stuttering economic recovery but risks making the country hostage to
speculators and currency carry trades.
The Russian reaction so far has been to cut interest rates by 450 basis points
over the past 12 months and intervening in the foreign exchange markets by
buying dollars and shifting with increasing regularity – twelve times in the
past three weeks – the rouble’s floating trading band in its euro-dollar
currency basket.
The central bank now seems poised to ease interest rates by a further 50 to 75
basis points this month after its last 25bp cut in February. And apart from
more easing and foreign exchange interventions, the central bank is also
understood to be considering increasing the reserve requirements in the
Russian banking system.
Worried
Moscow is clearly worried by the increasing appetite of speculators for hot
roubles. And although it has been considering taking steps to counter the
currency carry trade speculators, it has so far shied away from adopting the
Brazilian approach of imposing capital controls to contain the appreciation
of the Brazilian real. The Latin American country last October first
introduced a tax on purchases of local equities and bonds. In November it
followed this up with a tax on certain trades on American depositary
receipts issued by Brazilian companies.
But this by no means implies that Vladimir Putin, Russia's prime minister,
will not revert to some sort of capital controls. His government has been
discussing the issue, even though it would probably prefer to avoid taking
any measures that would inevitably raise questions over the country's
declared, if not always applied, commitment to a more open economy.
The rouble revival has at least confirmed one thing. Russia is still hanging
in with the other Bric (Brazil, Russia, India, and China) group of emerging
economies. During the height of the economic crisis, some suggested Russia,
with its over-dependence on oil, was the weakest link in the Brics. It
undoubtedly still is, but that is not stopping the speculators showing a
rational - or perhaps irrational - exuberance for the rouble.
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