Oil and gas in the capitals

Russia experienced quite a traumatic financial crisis by mid-December, when strong speculation against the ruble propelled it to more than 77 rubles against US$1. The ruble’s exchange rate began to depreciate after January 2014, when the Central Bank stopped its interventions. This movement corresponded, in part, to the former overvaluation and was natural. 

But since the beginning of July, this depreciation accelerated progressively until the spectacular events of Dec. 12-18, 2014, which are linked to a speculative attack. The consequences on the Russian economy are known: an inflationary trend, because of the brutal hike in the price of imported goods; an important reduction in investments for the same reason; and a temporary interruption of said imports, because of the uncertainties about the exchange rate. It is evident that this will entail a temporary recession in Russia during the first half of 2015.

Reasons for a crisis. The reasons that this currency crisis happened are varied. Of course, we had the various stages in the sanctions process related to the political crisis in Ukraine, as well as the answers that it elicited from the Russian government. These sanctions are building a particular psychological context, the importance of which goes way beyond the real effects of the measures taken on either side.

On the side of the United States and the EU countries, we have a set of sanctions, in the domain of industrial cooperation, as well as financial transactions. It is the latter sanctions, which seem, by far, the more important. The U.S. decided, during July, to extend the sanctions to the defense sector. We have, then, the sanctions that fall under the SSI regime of sectorial sanctions.¹ These sanctions ban Russian companies from borrowing for more than 90 days on the international financial markets. Further, they prohibit the increase of the external debt of private enterprises, as well as the roll-over of this debt upon maturity. 

Table 1. Amount of Russian repayments per quarter, $ billion. Click image to enlarge.

These actions produce a sharp penury of dollars in Russia, when the needs of companies are considerable, and specifically, for the two last quarters of 2014, Table 1. But, we can see that the situation is to ease by the beginning of 2015.

Oil price impact. A spectacular drop in oil prices aggravated this situation considerably. This sizeable decrease (-55%) is probably linked, in part, to the temporary oil glut that the market has experienced because of the surge of shale oil in the U.S. But other phenomena have also come into play, such as the will of the big oil producers (with Saudi Arabia in the lead) to limit the development of oil production from oil sands in Canada or shale in the U.S. Both these industries have a threshold of cost-effectiveness of at least $60/bbl, and probably it is more around $80/bbl.² The combination of these two factors, the American financial sanctions, and the fall of oil prices, has fueled a huge speculative attack against the ruble and provoked the December crisis on the exchange rate. 

But, the policies of the Central Bank of Russia also have had negative consequences. The Russian authorities have decided to fight off the speculative attack with the instruments of the market and not through the re-establishment of capital control. This action implied a strong increase in the interest rates (from 10.5% to 17%, and then back to 15%). These policies come at a cost. Should these interest hikes endure, they will strangle the Russian economy. If a policy of fighting the speculation by market means can be effective, the cost, direct as well as indirect, of this policy goes on increasingly rapidly. The government clearly hopes that by February, the downward pressure on the ruble will ease.

Long-term consequences. It is obvious that Russia cannot go on financing itself abroad, while counting on the vastness of its commodities exports to balance its accounts. Natural resources constitute an indisputable asset for economic development. There is, of course, value in processing most or even parts of these raw materials, with the aim to either raise the valuation, relative to more processed goods, or to reduce the price volatility.³ It will give Russia a much healthier type of growth and one that is less dependent on foreign economic (and political) development. Such a development policy raises, in turn, another issue: how to fund such a development. Internal financing is possible, and to some extent, even mandatory now. But, it demands that efficient mechanisms for repatriation of export profits, as well as for their distribution within the whole economy, should be put into place rapidly.

Here, we need to bring up the long-standing issue of true banking reform in Russia. One can see the strategic dimension of the exchange rate, but also that of a well-performing banking system. To some extent, the current situation could be used to implement such banking reform. A return to capital controls would give a free hand to regulators for implementing such reform.  

References

1. Office of Foreign Assets Control (2014), Sectoral sanctions identification list, July 16, 2014, U.S. Department of Treasury, http://www.treasury.gov/ofac
2. Rystad Energy, Morgan Staley Commodity Research. “Some sources refer to a real cost at above $80/bbl for shale oil.” 
3. Alquist R., and L. Kilian, “What do we learn from the prices of crude oil futures,” Journal of Applied Econometrics, Vol. 25, No. 4, 2010, pp. 539-573.

About the Authors

Jacques Sapir

Contributing Editor

Jacques Sapir is a professor of economics at the School for Advanced Studies in the Social Sciences (EHESS) in Paris, and at the Higher School of Economics in Moscow. An expert on Russian economic policy, he graduated from the Institute of Political Studies in Paris in 1976, and earned a PhD in economics from EHESS in 1980.