One can offer numerous explanations for why Russia has gradually started accepting the idea of the rouble's inevitable devaluation in early November 2008. Kommersant-Vlast commentator Dmitry Butrin is trying to find out whether a weaker rouble is part of the Russian Government's tactical plan, whether this is its blunder, or both.
Most importantly, no explanations can eliminate the link between the rouble's exchange rate and oil prices, the main national economic issue.
In early October, the Russian public would have been dismayed by discussions of whether or not the rubble would weather the global financial crisis. The rouble is one of the few emerging market currencies that can stand its ground in the current situation. Moreover, Russia's international reserves exceed $500 billion.
In early November, however, everyone, except government officials, became convinced that the rouble will eventually be devalued.
Such confidence was caused by just one insignificant fact. On November 10, Central Bank chairman Sergei Ignatyev said that the rouble's exchange rate could go down somewhat in the near future. On November 11, the Central Bank weakened the rouble by 1%, from 30.4 to 30.7, against its dual currency basket comprised of 55 cents and 0.45 euro cents, and raised the refinancing rate by another 1%.
Such actions prompted everyone to start discussing the rouble's inevitable devaluation last week.
Russian people have once again started hoarding roubles and converting them into dollars. Their possible financial gains, however, are not the main issue. Most analysts discussing the rouble's exchange rate are convinced that present-day developments have purely economic implications.
In October 2008, Russians had a chance to appreciate the so-called "non-oil-and-gas budget", a cumbersome term coined three years ago by Deputy Prime Minister and Finance Minister Alexei Kudrin.
Kudrin, who has been discussing this concept since 2005, displayed his logical prowess in August 2008, when the State Duma, the lower house of parliament, passed the federal budget.
After oil prices fell below $100 per barrel, the worried deputies asked Kudrin if the three-year financial plan would have to be recalculated.
Last Wednesday, Kudrin said at the Federation Council's meeting that the budget would be implemented if a barrel of oil did not cost less than $50 next year. The very next day, a barrel of Urals Blend oil cost $49.8. Oil prices determine all aspects of Russia's not-so-innovative economy, including the rouble's exchange rate.
Prime Minister Vladimir Putin and President Dmitry Medvedev, not to mention Sergei Ignatyev, are aware of such logic. On November 10, Putin summoned bankers, security agency chiefs, and oil businessmen to the Government House.
After the meeting, it turned out that half of the country's population trusted the rouble, which was recently considered reliable, but which is now all but doomed.
We will now discuss two contradictory assessments of the Kremlin meeting. The first theory implies that the rouble is the future victim of the so far non-existent Russian financial crisis, which, nonetheless, has afflicted the entire national financial system and part of the country's economy.
The Government House has already been forced to draft an economic bailout plan that said almost nothing about the key oil issue. On November 9, Nikolai Tokarev, CEO of pipeline monopoly Transneft, who usually does not like sharing bad news, told everyone that Russian companies had exported 25% less oil in early November than promised, and that oil exports were also bound to dwindle in December.
Although the extent of the disaster is still unclear, Russia faces problems in the realm of oil prices and export volumes.
There are some fairly obvious explanations for the failure of Russian companies to export more oil to the West and to compensate for falling oil prices.
First of all, nationwide oil production has stopped growing in the last few months.
This was largely caused by the Russian Government's 2004 policy, which implies that the state owns most oil export proceeds and that oil companies should content themselves with federal production development allocations.
Quite possibly, LUKoil, Surgutneftegaz, Rosneft, Gazprom Neft, TNK-BP, and other companies did not invest enough in oil production and preferred to build magnificent office buildings instead.
This is nonetheless irrelevant today. Russia has failed to develop oil output, oil-producing companies have to pay exorbitant taxes, and it is impossible to quickly sell any amount of oil on the market without bringing prices down.
With the onset of the financial crisis, many other arguments were voiced in favour of reduced oil output and exports. First, the companies lack loans for implementing current projects.
Owing to high risks and mutual distrust, the companies do not receive the federal aid being channelled through Vnesheconombank and state-owned banks. Moreover, the Government invited oil businessmen so that they could complain about the so-called "Kudrin scissors," a phenomenon that occurs when they have to pay exorbitant oil export taxes that far exceed current oil prices.
All oil companies are now saying that the export of even one barrel would leave them in the red until December 1. Although the Government has reduced oil export duties twice this October, oil prices are falling even faster.
In this situation, such developments can be easily explained. Oil companies do not want to sustain losses because this could lead to bankruptcy. After anticipating reduced profits, the banks have stopped loaning money to anyone.
Russia's foreign partners are calling the Foreign Ministry and asking whether Moscow is ready to deprive Europe of oil during the cold winter season.
Foreign Minister Sergei Lavrov, who also attended the Government meeting, was instructed on how to explain the situation during discussions with the aforementioned callers. The bankers were told that they should not joke with the state.
Oil businessmen were summoned in order to hear about projected federal aid plans. Finally, security agency chiefs were ordered to find out whether or not the Russian economy is being drained of sorely needed capital.
Ignatyev's actions after the meeting are motivated by the fact that a weaker rouble can help oil companies to at least some extent. The market is anticipating a weaker rouble, because it does not fully believe that Ignatyev will succeed.
Cheap oil, a strong rouble, persisting oil company problems, and the draining of Central Bank reserves would upset the current balance.
Last week, the Central Bank had $475 billion in international reserves and spent $190 billion worth of sovereign assets on the economic bailout plan. Moreover, the Central Bank has spent a lot on supporting the national banking sector.
But why do we think that Russian oil companies are facing any problems? In the final count, oil price trends are influenced by supply-and-demand and rouble-rate fluctuations.
The Kremlin and the Government know this axiom and can offer their own arguments.
If there are reasons to believe that the dollar would lose its hard currency status in the short term, that foreign central banks would no longer regard it as a reserve asset, and that oil will continue to rule the world, as before, then the November 10 meeting at the Government House has other prerequisites, and subsequent developments should be viewed with a different logic.
First, Russian oil companies are not as insolvent as they may seem. At any rate, not a single rating agency has reduced their credit rating. Moreover, LUKoil, TNK-BP, and Surgutneftegaz, not to mention the state-owned Rosneft and Gazprom Neft, are in no mood to incur the wrath of this country's already worried Prime Minister and President.
Consequently, Transneft CEO Nikolai Tokarev's week-old statement mentioned issues that were coordinated with Vladimir Putin.
Tokarev's statements that Russia is ready to deliver less oil to Europe in December, and that it has cut such deliveries this November, imply that Moscow is dissatisfied with current oil prices.
Russia's raw-materials sector and the officials patronising it have every reason to be dissatisfied with the Government's attitude towards this economic pillar since the beginning of the crisis. Bankers are in no hurry to grant loans to oil companies and Transneft, implementing high-priority "national projects", and prefer to charge 20% interest on loans earmarked for cell phone retailers and other retail chains.
The Government is not prepared to promptly reduce oil export duties in order to give them time to prepare for new oil prices and new markets. The Central Bank does not understand that, by exchanging the dollar for fewer roubles, it is undermining national security and impairing the oil sector's profitability.
Moreover, oil can become the pillar of a new global financial system. If the dollar tumbles, the world will have no choice but to use the currencies of stable national economies, the leaders of the multi-polar world. The rouble is regarded as the first among equals in this system.
Based on such logic, oil businessmen came to the Government on November 10 in order to score a victory. On that day, security agency chiefs told bankers that it was irresponsible not to believe in the rouble on the eve of its complete victory over the dollar.
Foreign Minister Sergei Lavrov was instructed on how to respond to Russia's critics who do not believe in paying the real price for Russian oil despite a global lack of energy resources.
Central Bank chairman Sergei Ignatyev knows that a somewhat weaker rouble will support the oil industry, that this will become the first step towards the rouble's future upsurge, and that the rouble now circulates together with the dirham, a unit of currency in Morocco, the United Arab Emirates, Libya, and Qatar, the Chinese yuan, the Brazilian real, the Venezuelan bolivar, and the Kazakh tenge.
Although this initial victory is scheduled for 2009, not all market players believe that this will happen. How does the current rouble compare with the future rouble? The industry, which considers regular loans to be far more important, does not care about inflation, which seems inevitable in such cases.
Given the current crisis, it does not matter whether such loans will come from Western partners or from Vnesheconombank. Future economic growth will finance everything, including a temporarily weakened rouble, a partial loss in savings, and reduced real people's incomes.
The winner in this war will take it all.
Either of these contradictory scenarios is rather sad. It is hardly surprising that market players are not discussing which one of them is correct this November. The events of early November show that the market, which is comprised of the Russian population, the banks, and the industry, does not care about specific causes and consequences.
Quite possibly, economic problems caused the current problems. The Russian Government wanted to overcome such problems by mobilising all resources, by means of police control and plans to defeat the dollar. Or, perhaps it was the other way around. The Government's plans for defeating the dollar led to economic problems.
Most importantly, neither scenario rules out ordinary logic. Falling oil prices cause economic problems for a country living off oil exports and the rouble, whose strength lies in a favourable economic situation for foreign and domestic economic agents, rather than correct state regulation.
This means that the market, rather than analysts, politicians and lobbyists, is right. In this situation, it would be counterproductive to make any abrupt moves and to harbour any secret plans. What we need is consistency and caution. Although the Central Bank has always been consistent and cautious, it is only part of Russian authorities.
The rouble now faces a small but growing threat.
***
Why are they causing nightmares for the rouble?
Dmitry Azarov
Last week, Central Bank chairman Sergei Ignatyev made it known that his bank agreed with the rouble's gradual devaluation. Kommersant-Vlast tried to assess the motives of Ignatyev's statement, which caused a financial market slump.
Pavel Medvedev, member of the pro-Kremlin United Russia party, the State Duma's financial market committee, and the National Banking Council, said:
Nothing terrible is happening to the rouble, which will grow weaker by a small margin. The Central Bank will support the rouble to a small extent, will allow the market to weaken the rouble a bit, but will discourage speculators.
Last week, the rouble fell by 1% in 24 hours because speculators were able to buy dollars in anticipation of a stronger rouble.
The Central Bank allowed this to happen in order to defuse tensions. Vladimir Putin has recently said, "We hoped that the banks would correctly disburse federal funding, but they bought dollars instead."
Upon hearing this statement, the Central Bank will tell other banks seeking loans that they should not increase foreign currency positions above the average levels posted in the last three months. Consequently, the rouble will face less substantial pressure.
I am convinced that in reality, the situation will be less dramatic. Looking back, there have been no signs of catastrophe.
Oksana Dmitriyeva, member of the Just Russia party, the State Duma's budget and taxes committee, and Labour and Social Policy Minister in 1998:
The rouble's devaluation is inevitable because it costs at least $15 billion a week to maintain its exchange rate. Given high real inflation and the dwindling foreign trade surplus, gold and foreign currency reserves could be depleted. The rouble would then come tumbling down.
This is why I support the Central Bank's policy for gradually devaluing the rouble. However, it is my opinion that the Central Bank chairman should not have stated this publicly, because this comment can devalue the rouble to a much greater extent than the market can. Second, some other measures should be implemented. The rouble's possible devaluation and a higher refinancing rate would make loans more expensive. On the other hand, we need to support domestic industries.
Apart from expensive credit resources, federal allocations are distributed among several major corporations and banks. We cannot implement mutually contradictory policies because this is a road into an abyss. In that case, it would only be possible to talk about how to avoid hitting rock bottom, rather than the rouble's exchange rate. Under the gradual devaluation policy, the rouble would be weakened by 10-20%.
Viktor Semyonov, State Duma deputy, Russian Agriculture Minister in 1998-1999, founder of the agro-industrial group Belaya Dacha:
I cannot understand the Central Bank's policies. We need actions that will not throw us into the abyss of devaluation. I am convinced that the rouble should cost ten times more at this time of crisis.
Dr Frank Schauff, CEO of the Association of European Business in Russia:
I think the Central Bank wants to save its gold and foreign currency reserves that can still benefit the Russian economy. It costs a lot to maintain the rouble's exchange rate, but this is an ill-conceived and dangerous policy during the current crisis.
Yakov Mirkin, board chairman at the European Finance investment company:
The Central Bank could have implemented quiet anti-crisis measures, without making too much fuss and without stating its love for a stronger rouble. An anti-crisis policy should avoid all-out slumps and forcible devaluation, while facilitating the rouble's gradual devaluation.
Given all other preconditions and provided that there will be no market shocks, one dollar would cost 27.5-29.2 roubles before the year is out. Everything else would take the rouble off this path. On the whole, the rouble's exchange rate will depend on subsequent oil prices, the dollar-euro conflict and Central Bank policies.
Yevgeny Yasin, head of research at the Higher School of Economics:
The rouble was growing stronger over the last few years. Many people used to say that such disgrace must be stopped. Everyone was waiting for the rouble to fall, but the rouble's exchange rate continued to increase on a par with rising oil prices. It would be pointless to resist a weaker rouble at this time of plunging oil prices, because this could cause the outflow of capital. On the other hand, we should not panic.
Vladimir Shcherbakov, board chairman at automaker Avtotor Company and former chairman of the USSR State Planning Committee (Gosplan):
I find it hard to assess the Central Bank's policies. Although I prefer to trust its officials, we are making assets more expensive and hindering production and the trade turnover at a time when the world is expanding trade turnover in order to prevent unemployment. This is probably being done for some unknown reasons.
