Rouble: volatility can be a good thing
2011-08-18 16:29:35
August has been an unusually quiet month for Russia, with fires, coups and wars conspicuously absent. In fact, the only area that is seeing the usual August excitement is the country’s currency market.
Since the start of the month, the rouble has managed to lose all of its 2011 gains and then, just as easily, post its biggest three-day advance in over two years.
While the rouble’s quick descent earlier this month has created a great deal of uncertainty on the market, analysts have been quick to point out how the volatility actually shows the positive evolution of the central bank’s monetary policy.
As Roland Nash, chief investment strategist for Verno Capital, a Moscow-based hedge fund, puts it, the rouble will likely serve as a “safety valve” for the Russia economy in the event of the further deterioration of global markets – a big change from previous crises.
“[For the government] it was extremely difficult [during the country's default] in 1998 to let the rouble go and still difficult in 2008 because a lot of companies had gone abroad and borrowed,” Nash tells beyondbrics.
Choosing the slow devaluation of the rouble instead, was a painful process for the Russian government, which spent $200bn in reserves defending the currency from collapse in 2008.
Three years later Russia is taking a different approach. While the central bank has sold some foreign currency to control the volatility, it has mainly let the rouble depreciate and allowed the currency to free float.
As Ivan Tchakarov of Renaissance Capital points out, the new policy will allow the rouble to absorb some of the shockwaves of global volatility and as a result help shield the Russian economy.
As an example, Renaissance has put together a model (see below) that analyses how a 1 per cent decline in US GDP would affect Russia’s economic growth depending on whether the central bank allows the rouble to depreciate, or not.
The results are striking. If the Central Bank intervenes to prop up the rouble, Russian GDP could contract by as much as 2.5 percentage points YoY three quarters after the shock, with the average annual decline of 1.5 percentage points. If it does not intervene, the maximum contraction would be 2.2 percentage points in the third quarter, and an annual decline of 0.9 per cent percentage points.
Meanwhile, Tchakarov says, a depreciation will do little to increase inflation, as food prices are significantly lower than during the drought last year. And, according to Nash, it could also restore Russia’s competitiveness.
The sharp devaluation of the rouble has had its consequences, of course. As Bloomberg reports, Russia’s government bonds were the worst performing this month among the BRICs.
But with 2008 in hindsight, a little rouble volatility doesn’t seem so bad after all.