Russia’s crisis – don’t write the Rouble off just yet
Russia’s economic woes have taken centre stage this week, with the value of the Rouble plummeting. In a surprise move, the Russian Central Bank hiked interest rates by 6.5% to 17% amid fears of recession in Russia and fiery rhetoric from Vladimir Putin.
Despite this, talk of a crisis is exaggerated. The Russian Central Bank has already acted to control the issue with the rise in interest rates and through its direct purchases of Roubles in the market by Russian authorities. This appears to have stabilised the currency for the time being.
Russia’s foreign exchange reserves remain among the largest in the world at an impressive $420bn, with an additional $170bn in other reserve funds. To add some perspective, the Russian Central Bank only required $2bn worth of Rouble purchases to stop the panic. Russia also has a relatively small level of external debt due to years of high oil prices and prudent budgetary policies. It stands at just 35% of GDP, nearly all of it held privately. Much of this debt is long-term, with just $125bn to be refinanced next year.
At current levels, the Ruble is extremely cheap, and the reward for holding it is significant thanks to high interest rates. Markets are underestimating the tools available to Russian authorities in their quest to stabilise their currency.