Russia’s currency is taking another nosedive in early trading, hitting new record-lows against the dollar and the euro. Falling oil prices have compounded fears about the country’s economy causing foreign currency to flood out of the country. The problem now is that the falling value of the rouble is itself causing problems for Russian companies, driving up import costs, squeezing profits and making foreign currency debt repayments hugely more expensive.
In short, Russia faces a death spiral of a falling rouble feeding fears of an economic collapse, which drive the rouble down further.
The currency continued its slide despite the Central Bank of Russia announcing a more aggressive plan to prop up the currency. On Wednesday, the Bank announced that it would buy roubles from the market “with the intensity equal to $US350 million per day” if it falls below a level that the central bank is comfortable with. But the news failed to stop further falls with the currency heading towards 45 roubles to the dollar.
More interestingly, the statement suggests that the central bank is looking to remove its unlimited support of the rouble because it has benefited “speculative strategies against the rouble”. The implication is that currency traders had been profiting from the bank’s scheme to protect the currency by shorting the rouble to the levels previously set out by the bank.
Now, with all eyes on the rouble, the claim that the exchange rate will be determined “predominantly by market factors” — effectively free-floating — is likely to be treated with scepticism.
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