How OPEC Destroyed The Russian Ruble
The Central Bank of Russia (CBR) was doing everything right. Responding to recent oil price falls, it floated the ruble and allowed it to fall in line with the oil price, intervening only to smooth out sharp price fluctuations. It hiked interest rates to counter domestic inflation despite the weakness of the Russian economy, due (in part) to Western sanctions. It resisted political calls to intervene to defend the currency, even when it was accused of being an “enemy of the country”. It sought, and obtained, political backing at the highest levels for its actions.
The CBR’s Governor, Elvira Nabiullina – no doubt mindful of previous disastrous attempts to support falling currencies – expected that allowing the ruble to fall freely would enable Russia to ride out the storm without suffering catastrophic loss of reserves. If the oil price stabilized at say $65 a barrel, the ruble would also stabilize, the Russian economy would be down but not out and everyone would laud her as a heroine. But she reckoned without OPEC. Or rather, she misunderstood OPEC.
Despite appeals from its smaller members such as Ecuador and Venezuela for production to be cut, OPEC has allowed the oil price to fall freely. On November 27thit announced that it would not cut production. And on December 15th, the United Arab Emirates’ Energy Minister suggested that oil could fall as low as $40 a barrel.
This was disastrous. The CBR’s worst-case scenario for the Russian economy assumed the oil price would fall to $60 a barrel. A price of $40 a barrel was simply unimaginable. Russia’s economy is terribly dependent on oil: if the oil price falls so low, severe economic recession is inevitable and default becomes a real possibility. The ruble’s slide worsened, bond yields spiked and CDS rose exponentially as capital flight intensified.
At this point Nabiullina’s inexperience became apparent. Any other central bank governor faced with such carnage would have openly talked up the ruble and calmed fears of economic collapse and default, and would have ensured that politicians sang the same song. Media management is an essential skill for central bankers, but unfortunately it does not seem to have featured largely in Nabiullina’s training. And because of this, it all went horribly wrong.
At midnight on December 15th/16th, the CBR announced a 6.5% rise in the interest rate. This sent completely the wrong message. Instead of calming markets, it was inevitably interpreted as panic. By morning, confidence in the CBR had evaporated and the ruble was in freefall:
Chart from Schuldensuehner
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