While the currency rates are creating utter panic on the market, Sputnik's Financial and Executive Editors sat down to discuss the causes of this fiscal whirlpool – and give you a simple and readable digest of what is happening with the ruble.
Executive Editor: Russia's Central Bank hiked the main deposit rate from 10.5 to 17 percent overnight to save the falling ruble. I know this has been done before in countries like Turkey. To me this looks like Baron Munchausen’s attempt to pull himself out of the swamp by his own braid. This obviously caused more harm than good, because now it’s nearly 100 rubles to 1 euro.
Financial Editor: It looks like there has been a massive currency exchange this morning. People are trading rubles for dollars and euros. Raising the deposit rate by 650 points is not going to stop the ruble from falling. In all truth, the rate has to be brought up to 100%.
Executive Editor: How is that going to save us? If the main borrowing rate is 100%, the banks will not be able to borrow money!
Financial Editor: Yes. It’s either that, or the ruble continues falling. Which is better? There are too many rubles on the market at the moment, 30 trillion to be precise. If the Central Bank raises the main interest rate to 100%, smaller banks will be forced to close, but that will lead to a healthier balance of the ruble and the dollar.
Executive Editor: How?
Financial Editor: A high interest rate will make the ruble grow. We had too many rubles on the market, and their overall amount grew from 15 to 30 trillion in just 5 years. We should have witnessed the ruble plummet much earlier, but all those dollar loans held it in place. Now there are no dollars – and the ruble is sliding down.
Financial Editor: And that is amazing!! There cannot be any loans during a financial crisis.
Executive Editor: We’re not growing the ruble by doing that; we are freezing it, creating an Ice Age.
Financial Editor: True, but not for long. We will only need 40 days of a hyper-high main deposit rate to get rid of all the extra ruble liquidity. 15% of loans in Russia are bad loans. That is bad for the ruble rate, too. Last, but not least, the Central Bank gave a 600 billion-ruble-loan to Rosneft last week, and Rosneft has dollar debts. If Rosneft were to buy dollars, for example, the ruble would be on its way to outer Space.
Executive Editor: When you say ‘get rid of the extra ruble liquidity’, will that make the ruble even cheaper?
Financial Editor: The other way around. But first banks need to stop giving out loans in rubles. The fewer rubles there are on the market, the better.
Executive Editor: It’s not all about loans though! People are panicking and buying dollars and euros, getting rid of their rubles. That is making the ruble cheaper.
Financial Editor: It could be worse. In 1998 the ruble fell from 6 to 30 rubles per dollar, which is 5 times cheaper than what it was before. So today there’s still room for it to fall to 150 rubles per dollar.
Executive Editor: I still don’t understand how freezing all loans can save the ruble. Imagine people are left with hard cash. The smaller banks are shut down. People are growing poorer and poorer. What will happen to those bad loans?
Financial Editor: Banks used to forgive bad loans. Now, if banks know that they will not be getting any more rubles from the Central Bank, they will demand returns, confiscate property etc. That way, all those rubles will go straight back to the Central Bank. This will stop the ruble from falling further. I mean… people can live without a loan for a new iPhone; they will lose much-much more if the ruble falls further.
Executive Editor: How will that help save the ruble?
Financial Editor: If the bulk of rubles comes back to the Central Bank and the Central Bank will stop feeding them back to the economy (which is important), there will be fewer rubles out there. If there are fewer rubles – the ruble grows. If there is a scarcity of something, it is always more expensive.
Financial Editor: There you go. That’s why the main borrowing rate is 17%, not 100% and the ruble is sliding further.
Executive Editor: The future is grim – I see people painfully returning bad loans, small banks slowly dying, and big companies are being bailed out. This 100% borrowing rate will only make the process go faster. What you’re suggesting is a financial nuclear winter. A shock therapy for the Russian economy.
Financial Editor: If what we need right now is to hold down the ruble – this is the only way possible. When the Central Bank printed those 30 trillion rubles, no one thought the dollar would be disappearing from our economy, and there it goes. What should we do now? Russia has $700 billion in debts, while our dollar income fell because of the falling oil prices. The question is – how far can it fall if we don’t start withdrawing money from the economy.
Executive Editor: The prices will rise if you withdraw money from the economy!
Financial Editor: Yes, that’s another problem. The less money, the more expensive the goods and services are. But it’s not that simple. A fiscal deficit holds the inflation down, because consumers prefer not to spend money. That’s what’s happening in Europe and Japan right now – everything is so expensive that the consumer doesn’t want to buy anything. Russian imports, on the other hand, have grown because of the falling ruble.
Executive Editor: Yes, people are buying cars and TVs like crazy. But, I will repeat this once again, if we are trying to save the economy by raising the main deposit rate to 100%, we are hurting the common folk, they run out of money, they stop investing, stop buying, prices plummet, businesses and entrepreneurs suffer.
Financial Editor: Yes, that’s the plan!
Executive Editor: There should be a different way. Can the Central Bank raise the deposit rate to 100%, wait for the money to come back and then spend it on subsidizing small and medium-size enterprises? Is import substitution even an option? How long will that take?
Financial Editor: Yes, if you do it carefully, if it’s controlled, if there is no way these investments can become liquid assets. If they do, this will weaken the ruble. Massive government investments often weaken local currencies. Import substitution is a long process that depends on the economy. Developing new branches can take up to 5 years, because you need trained personnel, new product markets etc.
Financial Editor: Of course! The growth of the industrial sector does not directly depend on currency rates. If we invest in its growth, the economy will become healthier, this will reassure investors and the ruble will grow. This is a great long-term strategy. But for now we are a resource-based economy with 70% of it state-owned, so the Central Bank will be bailing out state-owned companies.
Executive Editor: That’s why we got hit so hard by falling oil prices? What’s happing to the oil prices?
Financial Editor: The oil prices are falling because Saudi Arabia wants to stop the US from entering the oil market. They’ve done it before in 1986, now they want to do it again.
Executive Editor: So the Saudis are dumping oil prices to prevent the US from entering the oil market? How should we know it’s not a joint measure against Russia?
Financial Editor: That is also possible, but US oil is a threat to Saudi oil, because it’s hard to predict what could happen on the market after America enters it. Russia is not a dangerous competitor because it’s predictable. And it’s not even about that! There are economies much more reliant on natural resources: like Nigeria or Algeria, but they weren’t hit as hard by the oil prices. It’s the dollar deficit in Russia that’s causing this ruble crisis. It’s because large state-owned enterprises have huge dollar debts.
Executive Editor: There is no short-term solution for this.
Financial Editor: These is another way out: the sanctions are lifted on both sides, Russia is flooded with dollar loans, the ruble grows to 30, not 60 rubles per dollar, the economy is stable and healthy and pigs will fly.
Executive Editor: So what do people do now? Panic and freak out? Take money out of the banks? Spend the money? Cancel their holidays in Europe?
Financial Editor: Too late. All these options are bad. Many private entrepreneurs are setting prices in dollars and euros. If the deposit rate remains high, it may be a good idea to deposit your rubles in a major bank, but with all this panic on the market – none of this matters. Judging by what’s happening on the stock exchange, everybody is waiting for 1998 to repeat. With the dollar over 75 and the euro over 90 – this is utter panic.
Executive Editor: What are people supposed to do with their money now? Can they save it by depositing? A little bit?
Financial Editor: It depends on what the Central Bank does next. As of today, there is no way to save your money. If the government manages to stabilize the ruble, then depositing is a good idea. The Central Bank must limit the liquidity of the ruble as soon as possible. This is the only option. All other measures can wait.