Ruble Slide Continues; Russia Forced to Abandon Currency Intervention as Reserves Dwindle

In the wake of falling oil prices, tensions in Ukraine, and sanction madness that hurts both Russia and the Eurozone, the ruble has been on a huge slide.

Ruble Daily Chart



Since June the Ruble has slid from about 34 to the US dollar to 44.9 to the US dollar. That is a decline of 24 percent. A long-term chart shows an even bigger decline.

Ruble Weekly Chart



Since the beginning of 2011 the Ruble has gone from 28 to the US dollar to 44.9 to the US dollar. That's a decline of  37.6 percent.

Russia's Attempts to Stabilize the Ruble Fail

The decline has been pretty orderly until about June of this year. To halt recent decline, Russia hiked interest rates on October 31 to 9.5% from 8.5%.

As the first chart shows, that huge rate hike did not halt the slide.

Russia had also been intervening in the currency markets to the tune of about $2.5bn a day, but that's not a sustainable action.

Indeed, declining reserves forced the Russian Central Bank to Abandon Ruble Support.

The Central Bank of Russia announced an effective free float of the rouble on Wednesday, a step which triggered a fresh plunge in the currency but is intended to eventually stabilise it.

The rouble’s slide has accelerated in recent weeks, partly because the central bank’s policy of automatic intervention was an easy target for speculators making one-way bets.

Previously, the bank had been committed to interventions worth $350m each time the rouble fell outside the band – a policy that was easy for speculators to exploit and in recent weeks had cost it up to $2.5bn a day.

Following the announcement, the rouble was down almost 3 per cent against the dollar by late afternoon in London, briefly falling below Rbs45 to the dollar for the first time and nearing a symbolic threshold of Rbs50 against the central bank’s euro-dollar basket.

By accelerating the transition to a fully flexible exchange rate regime – originally planned for the end of the year – the Central Bank of Russia appears to be putting its trust in market forces instead of foreign exchange controls to fight off the risk of a financial crisis.

Floating the ruble is the right thing to do. The Ruble will eventually find the right level.

Some seriously misguided economists suggested capital controls, but that is more likely to cause panic than stabilization.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com