Russian Central Bank head Elvira Nabiullina has admitted that if currency markets continue to turn against the ruble the bank “won’t be able to restrain them.”
Despite the central bank spending $6 billion of Russia’s foreign exchange reserves in only 10 days to prop up the value of the ruble continued its slide against the dollar on Monday:
The admission that central bank is unable to defend a fixed exchange rate for the ruble against heavy selling of the currency by international investors demonstrates the extent of the country’s problems as it battles falling oil prices and a weakening economy.
However, it is unlikely to mark the end of state interventions in the market. Russian media report Nabiullina as saying:
I would like to stress that we’re not going to quit the foreign exchange market completely. We’re changing, so to speak, the nature of our participation in the foreign currency market. We’ll make interventions, if there are risks to financial stability.
The central bank is currently undergoing stress tests to gauge the impact of further sharp falls in oil prices after Brent crude oil traded as low as $US87 a barrel, its lowest point in 18-months on Monday. Oil exports are crucial for the Russian economy, particularly with international sanctions on the country’s financial and commodities sectors weighing on growth.
Falling commodity prices are help to drive the flow of foreign capital out of the country as investors sell their ruble holdings pushing down the value of the ruble relative to other currencies.
So far in 2014 Russia has burned through over $US55 billion of its international reserves, much of which has been spent buying rubles to prop up its value, leaving around $US452 billion in the coffers. It looks like it will have to dip even further into this pot if it is to protect the country from economic disaster.