The Timing Of Russia's Currency Crash Is Really Bad

The ruble is tanking.

The big near-term issue for the economy is capital flight, or money leaving the country.

And things don’t look good for Russia on that front. According to a Morgan Stanley note from last week, the short-term fundamentals are looking just awful for the currency. 

December is a peak month for budget spending, which means more RUB liquidity available amidst FX pressure. January in turn is a month of seasonally high capital outflows, which are unlikely to be compensated by export revenues this time with oil prices down 40%Y. Moreover, there are high external debt repayments due in December and February (US$33 billion and US$18 billion).

In other words, the timing of the currency collapse couldn’t be worse.

Wells Fargo economists say a Russian default is unlikely.

Still, the environment probably means a lot of inflation and pressure on consumer prices within Russia.  From Wells Fargo:

“About two-thirds of its debt is denominated in Russian rubles, with most of the remainder denominated in US dollars. Does the sharp rise in long-term ruble-denominated debt yields that is shown in Figure 2 really represent increased risk of default? After all, the Russian central bank could conceivably create an unlimited supply of rubles to pay off creditors. That is, Russian authorities could eventually roll over maturing debt by selling new bonds to the Russian central bank.”

As for the dollar-denominated debt, Wells Fargo says Russia has about $US38 billion worth and owes about $US6 billion in 2015 payments. The central bank has depleted its foreign reserves quite a bit to try to stabilise the currency, but the war chest is still plenty big (see left).

Despite the dire outlook for capital flight in the short-term, a Russian default does not seem to be on the horizon. 

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