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. Last Updated: 07/27/2016

Why the Free-Fall Ruble Continues to Drop

The ruble has already fallen 13 percent in the last three weeks to 779 to the dollar from 684 at the start of April but the main analyst at the Moscow Interbank Currency Exchange predicted in a telling article Friday, that the fall would likely continue.


Nikolai Gusev, an economist at the exchange where the ruble is traded twice weekly against the dollar, wrote in an article published in Izvestia that the ruble's decline in the next three months will probably be just as bad.


"In April through June it will be hard to avoid a weakening of the position of the ruble", Gusev wrote.


Gusev added that the ruble's continued decline had been caused by the same factor which triggered its initial slump last August: the emissions of credits and money by the Central Bank.


The proof that money supply growth is to blame, Gusev says, can be witnessed at the currency exchange, where, over the past three months the number of dollars traded on the currency exchange has remained roughly the same while the number of rubles has grown steadily.


"The main factor affecting the ruble rate remains the emission of credit and cash, which makes possible an increase in the supply of rubles on the exchange", he wrote.


The Central Bank's policy of issuing cheap credits to bankrupt state firms has fueled the money supply, as have so-called "technical" credits issued to ruble-bankrupt CIS republics to pay for imports of Russian goods.


But parliament and President Boris Yeltsin and his government have also contributed by running a massive budget deficit. Both sides have opened up the pork barrel in the runup to the forthcoming referendum.


In most countries governments borrow from the public to finance their deficits, but the Russian government borrows from the Central Bank. This means a budget deficit is just another source of central credit emissions.


In theory, the drop in the ruble's exchange rate should cut the demand for dollars both from speculators and from importers. Extra taxes on imports, especially excise taxes on spirits and cigarettes introduced this month, should also have priced imports out of the market.


But Gusev says the opposite is true. "Importers are sure they can pass on all their costs", he says. "Sometimes they base their judgments on the prices that will apply in a few weeks".


The standard Central Bank line is to increase the supply of dollars to the market. Gusev says this could be achieved by an improvement in Russia's export earnings coupled with tighter controls on repatriation of hard-currency earnings. Another idea is to create a hard currency ruble stabilization fund, presumably with western money.


This month has offered a few tentative indications that the Central Bank, under government pressure, may place less stress on these administrative solutions. The new, more monetarist approach is to limit the growth in the money supply.


The Central Bank raised the rate at which it lends to commercial banks on April 1. This week the Central Bank and the government agreed on a money supply growth of 30 percent for the period April to June compared to 57 percent from January to March.


Central Bank chairman Viktor Gerashchenko has been openly skeptical the target will be meet. Given Russia's unstable political situation it is hard not to agree.