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A shock to the rouble, but far from a catastrophe

9 Aug 2018 11:58|Marcin Lipka

The Russian currency lost 5% of its value in relation to the dollar during the day. This is the reaction of investors to the sanction imposed by the United States. However, the threats to the ruble are much smaller than in the case of the Turkish lira, which was mainly overestimated by the country's bad economic policy - writes Marcin Lipka, Conotoxia Senior Analyst.

The currencies of the countries divided between Europe and Asia have not been fortunate recently. The Turkish lira (TRY) loses its value practically every day. Only in the last month, the lira lost 16% to the dollar, and comparing to August last year, the price dropped to 35%.

At first sight, the fate of the Turkish currency may be shared by its Russian equivalent. The United States has decided to impose sanctions on Russia for its alleged participation in the poisoning attempt of Sergei Skripal's family in the United Kingdom. However, the situation of the rouble is fundamentally much better than the lira, due to the relatively good management of public finances and the surprisingly high independence of the central bank.

Sanctions, but which?

Over the past few days, the market has been speculating about the possibility of imposing US sanctions on Russia. This was a draft law (published, inter alia by Russian newspaper “Kommersant”), where Moscow was mentioned in the context of chemical weapons, cybercrime and the impact on the elections in the United States.

For this, the Russian Federation (RF) would face sanctions against 'politicians, oligarchs and others involved in illegal and corrupt activities'. In addition, the sanctions would also apply to "transactions related to investments in energy sector projects supported by state and parastatal companies from outside the Russian Federation". From an economic point of view, the latter is much more dangerous for Russia, as the country is dependent on the export of energy resources.

In fact, however, the revaluation of the rouble in recent hours is not the result of a law prepared by the US Senate. It was only a catalyst for nervousness on the rouble. The depreciation of the Russian currency led to the imposition of other sanctions (related to the Sergei Skripal case and the use of chemical weapons in March this year in the UK). They apply primarily to US exports to Russia, which may be important from the point of view of national security.

According to the Bloomberg agency, which refers to unofficial statements made by employees of the State Department, sanctions may block exports worth several hundred million dollars. It is a microscopic amount which will not in any way distort Russia's economic situation.

Danger but limited

The sanctions imposed in recent hours are therefore much smaller in scale than those prepared by the Senate. However, it is likely that the U.S. Congress Upper House law will not enter into force because it would cause too much damage and international tensions, and would also put too much pressure on the Russian economy.

Theoretically, however, the sanctions applied in the Skripal case may be noticeably extended (according to Bloomberg, including credit restrictions from American banks or restrictions on diplomatic relations), but this risk also seems to be rather limited.

In addition to the substantive issues, there is also the impression that the increase in pressure on Russia is to some extent also linked to the forthcoming Congress elections. It is therefore possible that this may be an element of an election campaign and an attempt to show which of the centres of power (the White House or Congress) is "harder" towards Russia. If this were the case, the economic impact of sanctions would be covered up by political discussion, and this should reduce the pressure on the rouble.

Russia is an economic oasis of stability in relation to Turkey

Although both the ruble and the lira are victims of U.S. sanctions, Russia's economy has recently been much better managed than Turkey. In July, inflation amounted to 2.5% y/y in the Russian Federation vs. Turkey, where it reached 16% y/y.

Moscow can also be proud of its current account surplus (which mainly comes from the advantage of exports over imports) at the level of about 3% of GDP. This year, Turkey is likely to have a current account deficit of 6% of GDP and a need to obtain financing from abroad on a permanent basis.

In contrast to the Turkish authorities, the Russian central bank authorities are very trusted. During the crisis in 2014-2015, they decided to stabilise inflation through a strong increase in interest rates, while accepting the risk of a significant economic downturn. Turkey, on the other hand, has chosen the path of an uncontrolled fiscal stimulus, the effect of which is the current monetary crisis and inflation, which is gigantic for the current global environment.

The chance to avoid deep discounting

Although the reaction of the rouble has been very nervous in recent hours, there is a limited risk that it will increase dramatically in the coming weeks, considering the political and economic circumstances. The rouble should not, therefore, share the fate of the Turkish lira, assuming, of course, that American sanctions will not escalate strongly.


9 Aug 2018 11:58|Marcin Lipka

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