In the red: the rouble’s fall is not entirely bad news © ASS/Getty
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As Russia’s geopolitical stand-off with the West hardened in 2014, accountant Evgeny Sivkov published a children’s book titled “How The Brave Rouble Defeated The Cunning Dollar”.

On its cover, a bear in a traditional Russian embroidered shirt excitedly clutches a shiny silver one-rouble coin as a cackling Uncle Sam figure, aided by a pair of skunks, prepares to deploy a stack of dollar bills rolled up into toilet paper. Luckily, the story goes, the bear discovers a magical rouble-making machine, burns all the dollars and reunites the Soviet Union under a single currency.

The rouble traded at about 30 to the dollar when Sivkov’s book was written. In January this year, it hit a new historical low of 85, making Sivkov’s book a laughing stock on Russian social media.

The collapse has made the rouble one of the world’s worst-performing currencies over 2014-15. But the weakened rouble and its dependence on oil have been arguably the key factors allowing Russia to weather the storm in emerging markets with some facility.

Central bank governor Elvira Nabiullina was widely criticised for a stop-start interventionist approach during two weeks of unprecedented volatility in December 2014 where she spent $12bn, according to the central bank, in a failed attempt to prop up the rouble and nearly saw a run on the banks. But she has won plaudits for largely sticking to a free float since then.

The move has left the rouble almost completely at the whim of the oil price. “Practice shows that amid low oil prices the correlation with the rouble exchange rate surges to almost 100 per cent,” Russia’s economy minister Alexei Ulyukaev said in March. “The higher oil prices are, the lower the dependence is.”

Although a recent rise has seen the rouble gain about 20 per cent on the dollar since its January 21 low, the central bank — sceptical the rally is sustainable — is keeping interest rates at 11 per cent even as inflation has almost halved on a year ago, to 8 per cent.

Yet while the central bank’s policy, in their words “moderately tight”, has drawn criticism — some influential figures, including former Putin aide Sergei Glazyev, have even called for capital controls — Ms Nabiullina’s reluctance to spend more of Russia’s $387bn reserves has won her the backing of Mr Putin. “Gold and currency reserves were created by the central bank for purposes other than financing current economic problems,” he told a business forum in March.

“They were just giving away the reserves to the market. It was like playing poker and showing someone your hand before the last bet,” says Chris Weafer, a partner at Moscow-based consultancy Macro Advisory. “Allowing the rouble to free-float was basically the lesser of two evils. There was no alternative — they would have run out of money.”

Living with low oil prices now means living with a rouble trading to the dollar at half the value of two years ago. Mr Putin has urged ministers and businesses to take advantage of the “additional opportunities” in the new normal.

That starts with weaning Russia off its dependency on oil and gas, revenues from which make up about 50 per cent of the budget. Lower operating costs in dollar terms have created incentives to invest in manufacturing.

Even against a 31 per cent fall in total exports, according to the World Trade Centre Moscow, foreign demand for suddenly cheap agricultural products has skyrocketed.

Foreign tourism to Russia went up by 13 per cent, according to the head of Russia’s tourist board, largely driven by an uptick in Asian visitors greeted at department stores by signs in Mandarin offering them “Milan prices” on luxury goods. Russian oil firms have coped better than their counterparts thanks to paying wages in roubles.

To retain that edge, officials say they are unwilling to let the rouble strengthen far beyond 60 to the dollar. The central bank has shifted to administrative measures to reduce demand for foreign currency, including a one-year repo for foreign currency loans, stronger pressure on exporters to sell foreign currency and efforts to deter “speculators” from creating volatility by hedging the rouble.

Depreciation carries its own risks — chiefly to ordinary Russians, who have seen their real disposable income fall by nearly 10 per cent in the last year, according to official statistics. “They can’t drive the rouble rate up forever, because it hurts Putin’s core base, who are vulnerable to inflation,” says Natalia Orlova, chief economist at Alfa-Bank.

With parliamentary elections expected this September ahead of Mr Putin’s anticipated re-election in 2018, however, few think the government will make any radical policy changes. “If the rouble hits triple digits, we have a crisis. But oil has to fall for the rouble to get worse,” says Ivan Tchakarov, chief Russia and CIS economist at Citibank. “They’re just waiting for oil to go back up.”

Copyright The Financial Times Limited 2017. All rights reserved.
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