Cooling the Boiling Public
Falling oil prices and Western sanctions limiting access of capital to the Russian market resulted in rapid ruble depreciation, especially since they coincided with the Central Bank’s change of policies eventually allowing the free flow of the national currency for the first time in history. Occasional intervention and other soft measures by the Central Bank could not stabilize the situation, and the ruble’s fluctuations reached up to 30%.
It took the nation’s financial authorities several days from the evening of Friday, December 12 to Tuesday, December 16 to design and have the President approve key measures when the Central Bank radically increased the interest rate from 10.5% to 17% and introduced other measures to increase foreign currency inflow into the Russian market. At the same time, the government is exerting pressure upon major exporters to sell a large part of their foreign currency revenue in the national market to increase supply to support the ruble’s stability. Strong measures took time to be implemented as the financial authorities needed presidential approval despite fierce counter-lobbying by other actors, most importantly large companies, including state-owned companies that require debt refinancing either immediately or in the coming months.
Although for now the currency seems to have stabilized, it is difficult to be certain regarding its further prospects. In addition to further potential changes in the global energy markets, political factors also make it difficult to predict future ruble performance. First, ruble fluctuations have at least partially been fueled by a state-owned oil company that needed to purchase foreign currency for a scheduled debt payment and forced the Central Bank to cooperate. As large state-owned corporations are mostly led by Putin’s close personal friends, that situation may arise again in the future. Second, new factors also make the situation difficult to predict. For example, many Russian companies now have limited ability to buy foreign equipment because some of it is either directly forbidden by sanctions (oil and gas extraction equipment) or is still in the “grey zone” due to potential military use (transportation equipment). In addition to limiting long-term development, that situation also has a short-term effect because the companies are importing less and therefore need less foreign currency, which decreases pressure on the ruble.
Numerous optimistic promises made by various government and Central Bank officials throughout the year regarding the ruble’s prospects have proven wrong as the national currency exchange rate is short of falling 50% in 2014. This has caused widespread irritation and government-mocking in capital cities among wealthier and better-educated citizens who used to travel and consume imported products. As a large majority of the population lost its savings in rubles and would not be able to afford to travel abroad or purchase expensive foreign products anymore, they fueled a consumer boom, buying autos, consumer electronics and real estate ahead of a predictable price increase. Smaller parts of the population have been especially damaged if they had mortgage or tuition loans denominated in foreign currencies. Many of them started street protests weeks ago, but with no effect so far.
President Putin’s annual press conference could not, of course, get around discussing the nation’s economic situation, but hardly any news came out of the conference besides an attempt to restore the public’s trust in the government. The President’s personal charisma has limited ability to impact citizens’ economic behavior but for the large majority of population the changes have not yet been too dramatic. Spending optimization and currency rate changes have not yet resulted in job cuts or even significant food price increases. Although the latter is expected to take place early next year, it has not yet resulted in any widespread dissatisfaction with the government, not to mention widespread street protests, and the political situation currently remains stable.
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