Russia's Central Bank Curbs Interventions as the Ruble Spirals Out of Control

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A woman is reflected in a window with a board displaying currency exchange rates in St. Petersburg, September 16, 2014. Alexander Demianchuk/Reuters

The Russian ruble fell to record lows early on Friday and many analysts fear that a continuing decline could spark a major currency crisis in Russia. After months of trying to curb the downward trend by selling off up to $1 billion of foreign currency a day, Russia's Central Bank now plans to pull back on its interventions in a desperate attempt not to batter the economy even further.

On Friday the ruble slid to new lows of over 48 to the dollar, and 60 to the euro. Whilst there was a slight recovery around midday to 58.45 against the euro and 47.17 against the dollar, the currency is still at a record-low, having fallen over 40% against the dollar since the beginning of 2014.

A strong dollar, the declining prices of oil - which constitutes most of Russia's export revenue - and Western sanctions against Russia over its involvement in the conflict in eastern Ukraine, have all hit the ruble hard.

The former deputy minister and current chief economist for Vneshekonom bank, Andrei Klepach also blamed the Russian economy's colossal capital flight for the decline. "If it weren't for capital flight, the rate would be around 35-36 rubles to the dollar," he told the Russian online newspaper Gazeta.ru.

The Central Bank has intervened a number of times this year to try to curb the decline, including an increase in interest rates to stabilize the currency as capital flees the country. However, such steps appear to have had little success. Timothy Ash, head of emerging market research at Standard Bank, told Newsweek: "There are just too many negatives working against the Central Bank - poor growth, low oil prices, economic sanctions and unfavourable geopolitics."

And now, amid the ruble's plunge to an all-time low, the Central Bank - having already spent $70 billion this year to curb the decline - is taking a step back.

With 43% of that $70 billion spent in October alone, Russia's Central Bank announced on Wednesday that it would not spend any more than $350 million of foreign currency reserves a day to help reduce the decline, because doing so would threaten financial security.

"[The Central Bank] has to do to something," Ash said, "But there are no easy options, they are faced with a very unenviable task. They've already allowed the currency to weaken, which helps as it takes some of the selling pressure away. However, when you do this you have to be careful, because if it happens too quickly people panic. In this situation, weakening the ruble has actually made it spiral out of control."

Analysts warn that the continuing declines could trigger a currency crisis.

"The situation is tense and the panic is here, primarily from households. I think that the central bank is surprised itself and has lost control of the situation at the moment," said Dmitry Stadnik, chief trader at Rosbank, Russia's branch of the French bank Société Générale.

Even if Russia manages to avoid a full blown currency crisis, the future for the currency is bleak: "With all the negatives working against it, the long-term trend for the rouble is undoubtedly weaker," Ash said.