Since mid-August, the depreciation of the national currency has become perhaps the main concern of the government and the Bank of Russia. The weakness of the ruble has ceased to be just an economic issue and has moved into the political sphere. There is no doubt that the authorities have enough economic, administrative and even informal levers to prevent further weakening, at least in the medium term. The only question is at what cost that stabilization will be achieved.Political milestone
On Monday, August 14, almost immediately after the opening of trading on the Moscow Exchange, the dollar passed the 100-ruble mark, while by the middle of the day it had strengthened another one and a half rubles. On the same day, Vladimir Putin’s aide on economic issues, Maxim Oreshkin, published a column on the website of the state news agency TASS
entitled “A strong ruble is in the interests of the Russian economy.” The column ends with the assertion that “the weak ruble is complicating the structural restructuring of the economy and negatively affecting real incomes of the population,” which seems at least debatable.
From the standpoint of household incomes, everything is straightforward: a weak ruble means expensive imports, higher inflation and a decrease in the purchasing power of wages, pensions and social benefits, though there are nuances. Oreshkin did not explain why the weak ruble is complicating the structural restructuring of the economy; instead, he focused on finding the reasons for the depreciation and painted a rather interesting picture. The economy is recovering swiftly. The driver of the recovery is fiscal stimulus. However, despite the sharp uptick in budget expenditures, there was no major strengthening of the ruble. The main reason is the central bank’s overly soft monetary policy.
If you look at the structure of the money supply, lending to companies and the population played a key role in accelerating demand. Thus, corporate lending led to RUB 9.5 trillion of additional demand in the economy, while household lending added RUB 3.3 trillion. In recent months, lending has been accelerating. The acceleration of consumer lending is especially concerning. These figures significantly exceed the volume of the budget deficit, which since the beginning of the year amounted to only RUB 1.5 trillion. Overall, since the beginning of the year, the budget channel has absorbed the money coming from the economy, providing a negative impact on the money supply,” writes Oreshkin.
Oreshkin does not ask what role credit-driven demand from the population and the corporate sector played in the bounce-back growth. Thus, it emerges that all the successes were thanks to the Ministry of Finance and all the problems were the fault of the central bank.
The Bank of Russia simply could not ignore such an unambiguous “signal from the Kremlin.” On the morning of August 15, it announced a key rate hike from 8.5% to 12.0% (read Nikolai Petrov’s piece
on it in RP
). By this time, the dollar had softened to 95 rubles. This unexpectedly hawkish decision convinced market participants that the worst that could happen had already happened. The authorities clearly demarcated the line for ruble weakening that threatened even more serious effects. However, it has since emerged that, firstly, 12.0% is clearly not the end, and secondly, raising the key rate is far from the only way to stop ruble depreciation.