The Corner


So far it seems that (as is often the case) the first real round of central-bank shock and awe has not halted a foreign currency rout.


Russia’s rouble has fallen to a new record low despite a dramatic interest rate rise by its central bank. It increased rates from 10.5% to 17% in an attempt to boost the currency’s value against the dollar. The rouble has lost almost 50% against the US dollar this year as falling oil prices and Western sanctions continue to weigh on the country’s economy. The rate rise helped the rouble to 58 to the dollar early on Tuesday but the dollar now buys as many as 75 roubles.

(As I write, the ruble has fallen to 78).

If I had to guess, It’s going to take a lot more than a 17 percent interest rate (in inflation-adjusted terms “only” 700 basis points or so) to halt the ruble’s plunge. The chances of capital controls must be rising quite sharply.

A just-published Bloomberg article (“Will Ruble’s Rout Force Capital Controls?” ) is worth reading on the topic. It draws interesting comparisons with Malaysia in 1998 (the country introduced capital controls in response to the Asian financial crisis).

This comment was particularly worth noting:

[Putin’s] anti-Western advisers are evidently holding up the Malaysian example. “What can [Central Bank Governor Elvira] Nabiullina do within the market model if she is forbidden to sell too much foreign currency and some of the world’s biggest financial players have been ordered to play against her?” Sergei Markov, a pro-Putin academic, wrote in a column on “Since the reasons for the ruble’s fall are political, the response should be political, too. For example, a law that would ban Russian companies from repaying debts to Western counterparties if the ruble has dropped more than 50 percent in the last year. That will immediately lower the pressure on the ruble, many countries have done this, Malaysia is one example. It’s in great economic shape now.”

The article does not talk about the possibilities for profit that a ‘managed’ exchange regime can offer well-connected insiders. I doubt that Mr Putin is unaware of that opportunity.

It’s also worth going back to look at some of the commentary circulating in Russia a month or so back.

This was from the Moscow Times:

An adviser to President Vladimir Putin suggested to lawmakers on Monday that Russia impose a tax on money being moved abroad, as government predictions of capital outflow this year rose to $120 billion amid tensions over Ukraine and a weakening ruble.

“To reduce the stimuli for capital outflows … we have to fight the export of capital,” Sergei Glazyev was quoted by RIA Novosti as saying in a parliamentary debate about ways to boost economic development. “I would propose thinking about the introduction of a tax on the export of capital.”

Russia scrapped the last of its capital controls eight years ago in an economic reform that was considered a landmark of Putin’s second presidential term.

The first deputy chairman of the Central Bank, Sergei Shvetsov, said last week that any re-introduction of capital restrictions would be a “political” decision, but he admitted that the bank was discussing “measures to reduce the vulnerability of the Russian financial market,” Bloomberg reported. The Central Bank has raised the benchmark interest rate by 250 basis points to 8 percent this year, in an effort to shore up Russia’s economic position, but tensions over Ukraine have helped send the ruble to historical lows and pushed up capital outflow to levels not seen since the financial crisis of 2008….

Laying out the proposals in more detail, Glazyev said Russian companies legally importing goods could be exempt from his capital export tax. He did not got give any estimates for a possible time frame for implementing such a measure. Glazyev, who is on the sanction lists of both the U.S. and EU, advises Putin on economic integration with former Soviet countries. Last year he was reportedly a leading — albeit ultimately unsuccessful — candidate to head Russia’s Central Bank. While the 53-year-old economist’s hawkish views are often considered oddball and not always endorsed by the Kremlin, his outspoken criticism of Kiev over its move toward deeper economic cooperation with Europe has closely matched official rhetoric and Russian policy.

It is of course not unknown for the Kremlin to use outliers (and Glazyev is not really an outlier) to float trial balloons.

The central bank so far is sticking to the conventional policy response it would (I think) undoubtedly prefer, but will it have the last word?

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