The Russian central bank was forced to intervene again in currency markets to defend the ruble as it continues its collapse.
So far in October the central bank has spent around $US1.85 billion trying to keep the ruble from falling too much against the dollar and the euro. Since the start of the year the country’s international reserves have shrunk from $US509 billion to $US454 billion — a $US55 billion drop.
As you can see from the chart below, it has been so far been unable to halt the slide:
Why is this happening? Well the cause of the latest pressure has come mostly from the worsening outlook for Russia’s most important export — oil. Brent crude oil prices slid to a 27-month low on Wednesday, over 20% down from its June peak, meaning that it has now technically entered a bear market:
Falling prices are being attributed to a supply glut after Russia produced a post-Soviet record of 10.61 million barrels a day in September while surprise improvements to output in Libya helped push up OPEC production as well.
The Russian economy is dependent on its oil industry, and if oil prices collapse then the ruble follows as investors make bets against the Russian economy.
Fitch Ratings warned on Wednesday that prices could continue to decline to $US80 a barrel, a level that hasn’t been reached since the second half of 2010.
Further declines might be possible, especially if evidence grows of further weakening of global demand or increasing OPEC spare capacity. Demand has been the clearest change in the short term, but is also the element that may most reliably reverse in the long term. If China and India grow as expected, demand could rise by up to a third in the next 20-30 years, but this does not preclude short-term weakness.
What this suggests is that, for the moment at least, Russian currency interventions are here to stay and they are likely to take a huge chunk out of the country’s foreign currency reserves. But a more pressing problem for the Kremlin will be that if the oil price continues to decline it will also take a significant toll on government tax revenues, limiting its ability to deliver on spending promises.