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Can Anything Save the Ruble?

Vladimir Putin has some ideas to help the struggling Russian economy. None of them are going to work.

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Woe to Russian consumers who like Swiss watches with their Italian suits — or even furry Australian boots with their Chinese disposable fashion. The ruble has lost more than 40 percent of its value in the past year, including a drop of about 8 percent so far this week, and the slide shows no signs of slowing. But with Vladimir Putin offering ideas that are dubious at best, does Moscow even want to stop the rot?

Earlier this year, Russia’s central bank took heroic measures to prop up the ruble. It spent $40 billion of its foreign reserves between January and May — about 8 percent of the total at the time — on its own currency in order to raise the ruble’s price in global markets. Then, though the ruble continued to slip, the central bank was quiet … for months.

What happened? In all likelihood, the central bank realized that it might need its reserves to strike a decisive blow against an all-out speculative attack by currency traders on the ruble — the kind of attack that crippled the Thai baht in 1998. If the Russian government wanted to defend its currency, it would have to take a new approach. This time, the strategy would rely on Russia’s biggest export, crude oil.

Woe to Russian consumers who like Swiss watches with their Italian suits — or even furry Australian boots with their Chinese disposable fashion. The ruble has lost more than 40 percent of its value in the past year, including a drop of about 8 percent so far this week, and the slide shows no signs of slowing. But with Vladimir Putin offering ideas that are dubious at best, does Moscow even want to stop the rot?

Earlier this year, Russia’s central bank took heroic measures to prop up the ruble. It spent $40 billion of its foreign reserves between January and May — about 8 percent of the total at the time — on its own currency in order to raise the ruble’s price in global markets. Then, though the ruble continued to slip, the central bank was quiet … for months.

What happened? In all likelihood, the central bank realized that it might need its reserves to strike a decisive blow against an all-out speculative attack by currency traders on the ruble — the kind of attack that crippled the Thai baht in 1998. If the Russian government wanted to defend its currency, it would have to take a new approach. This time, the strategy would rely on Russia’s biggest export, crude oil.

Exporters of oil in Russia ultimately turn the dollars they receive into rubles.* At lower oil prices, they don’t receive as many rubles, and the demand for the currency falls. To stop the exchange rate from dropping, Russia has to export more goods and services. Right now, that means more oil.

At the moment, Russia is probably shipping 5 to 6 million barrels of oil abroad every day. That’s as much as one-third more than it exported last year. Its daily oil production is holding at around 10 million barrels, with no cuts in sight; unless domestic consumption were to spike — unlikely with the Russian economy on the verge of recession — those bumper exports will continue.

But will they be enough? At current prices, Russia’s exports of crude oil could be worth close to $140 billion a year. Yet in 2013, when oil prices and the ruble were both much higher, the total came to $174 billion. Even at booming production levels, the value of Russia’s exports in dollars is still down by 20 percent.

Indeed, this is why cutting production now, as the Organization of the Petroleum Exporting Countries (OPEC) wanted, would have been so dangerous for Russia. The idea of the cuts was to push oil prices higher in the medium term, but a temporary dip in the value of Russia’s exports would have left the ruble exposed.

No, Russia must keep pumping to keep the ruble afloat on a sea of oil. But by doing so, it guarantees that prices will stay low for longer. It’s also depleting another kind of reserves — its oil reserves — in the worst possible way by selling more, not less, when prices are low. And it hasn’t even solved the problem.

In the meantime, the central bank has returned to the markets to buy rubles, spending as much as $350 million a day since October. But there’s a limit to how far it can go; its reserves of foreign currencies were already down by close to 20 percent for the year when buying began, reducing the safety net for both currency attacks and credit crises like the one that hit in 1998. Investors are already warning that the country’s credit rating may soon be in jeopardy.

With the central bank increasingly hamstrung and oil production already straining its limits, what else can Russia do to bolster the ruble? In his state of the nation speech, Putin suggested a no-questions-asked amnesty for foreign funds returning to Russia. Such a move would bring in some foreign currency but also allow unfettered money laundering and tax evasion — perhaps something his cronies would appreciate. Argentina tried this in 2013, and it didn’t stop the peso from crashing earlier this year.

Unfortunately, the composition of Russia’s economy leaves few other options. In most countries, a weaker currency can be a self-correcting problem. It makes goods and services cheaper to foreign buyers, stimulating demand. When enough new demand reaches the market, the currency stabilizes. But Russia’s dependence on oil means it isn’t most countries and oil isn’t most exports, either.

Oil prices are set in a global market where Russia’s share is probably below 10 percent. When the ruble loses value, oil prices to foreign buyers don’t change. The buyers need the same amount of their own currencies to purchase each barrel, so they have no incentive to consume more. This wouldn’t be such a problem, except that more than two-thirds of all Russian exports are in the energy sector.

The same problem affects another mechanism that often works to settle a struggling currency: bargain-hunting. With the ruble at such low levels, investors might have been expected to flood Russia with foreign cash in a rush to grab assets at low prices. But most of the valuable assets in Russia’s economy are, once again, in the energy sector — currently unattractive, and often unavailable to foreign buyers, anyway. Even if higher oil and gas prices arrive, this dynamic won’t be of much help, either.

Of course, there is one big thing Russia can do to save the ruble: end the crisis in Ukraine. With sanctions lifted, some of the tens of billions in foreign money that left Russia might return, boosting the ruble and the economy at the same time. Yet this option doesn’t seem to interest many people in Moscow — at least not many people named Vladimir.

*This article has been corrected to reflect that Russian oil exporters receive dollars, not rubles.

Jason Lee – Pool/Getty Images

Daniel Altman is the owner of North Yard Analytics LLC, a sports data consulting firm, and an adjunct associate professor of economics at New York University’s Stern School of Business. Twitter: @altmandaniel

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