Emerging market currencies have been in turmoil lately. And mostly attention has been paid to countries like Turkey and South Africa.
But the dynamics affecting those countries are also affectng a much bigger economy: Russia, which is increasingly finding itself in a sticky spot.
The ruble has fallen to a five-year low and we’ve seen one-year interest rates surge.
Russia has been blighted by weak external demand, slower investment growth, and declining consumer growth.
And considering that Russia’s economy is largely dependent on energy exports, weak external demand is unwelcome news.
Russia is the second-largest producer of dry natural gas and the third-largest oil producer. And oil and gas revenues account for more than 50% of federal budget revenues as of 2012, according to the EIA. “A vibrant transformation of the global energy markets poses medium-term threats,” writes Societe Generale’s Evgeny Koshelev.
And of course as a country reliant on natural resource exports there are some concerns that it could fall into the Dutch disease trap. Some argue that Russia already is in the throes of it.
The term refers to economies driven by commodities exports seeing their currencies get overvalued. That in turn hurts its own manufacturing sector by making imports cheaper.
Factor in that the energy sector and the corporate sector are dominated by state-run companies and the problem becomes a bit clearer. “In Russia, the corporate sector is dominated by state-run companies. The efficiency and flexibility that the private sector tends to provide, is thus missing in Russia Inc,” Morgan Stanley’s Joachim Fels wrote in a note late last year.
We’ve already seen emerging market currencies take a hit following a string of central bank tightening. The ruble recently hit a five-year low, but Russia’s central bank is trying to limit intervention as it hopes to have a free-floating currency by 2015.
The one thing Russia has going for it, unlike the Fragile Five economies, is that it has a current account surplus, so there are some who argue that ruble weakness could dissipate in coming weeks.
But it isn’t that simple.
“At constant high oil prices, Russia’s current account surplus has fallen from 5% of GDP in 2011 to 1.6% in 2013, driven by a wide range of factors, including a shrinking trade surplus, surging services and income deficits and a rise in labour remittances,” writes Morgan Stanley’s Jacob Nell.
“Also, reflecting the lack of investment and competitiveness of the economy, the proportion of non-commodity exports relative to GDP has fallen from around 15% 10 years ago to 8.3% in 3Q13, on a 4Q sum rolling basis. Although our economists see the pace of deterioration in the current account slowing with a weaker RUB in 2014, they still forecast a 1% of GDP contraction in the current account surplus in 2014 to 0.6% of GDP before slipping into a mild deficit in 2015.”
There is also some concern that the Fed taper could “trigger significant ruble devaluation and worsen business sentiment,” writes Koshelev.
Keep an eye on this story. It could get more interesting.
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