What has caused the fall of the ruble
The next day after the publication in Kommersant the full text of the draft law providing for the introduction of US sanctions against Russia, began a sharp depreciation of the ruble and stock quotes. The first set of sanctions restricting U.S. exports to Russia, will enter into force on 22 August. If within 90 days the Russian Federation will not be able to prove his innocence to the use of chemical weapons in the UK, sanctions will be tightened. They are likely to include:
prohibition of operations with the external debt of the Russian Federation;
the restriction of the export of high-tech equipment, including for oil and gas industries;
the restriction of imports of oil and oil products from Russia.
According to American experts, the second set of sanctions will affect about 70% of the Russian economy and 40% of the workforce.
Since then, the ruble continued to depreciate rapidly, reaching 9 Aug minimum 2 years in 66.7. This week was the worst since April 2018, when the Russian currency has lost almost 7%. The dollar these days grew by 5.8% compared to the end of July and 14.6% in comparison with January.
The depreciation of the ruble was accompanied by a fall in the depreciation of the stock of Russian companies. The stock index lost 2%, Aeroflot – 12.2%. Dropped the price of government bonds, is very popular among the investors due to its profitability. Foreigners are buying about 30% of Russian bonds. However, despite the increase in yields and decline in prices, at auction August 8, managed to sell only half the planned amount. Rose sharply the five-year Russian credit default swaps, which reflect the cost of insuring the debt before default. Compared with the beginning of the week, they rose from 133 to 154 -134.
As a weak currency affects the economy: theory
The weakening of the national currency against the reserve (dollar) means that to buy 1 us dollar need a larger quantity of the national currency. If the country is actively involved in the international financial and trade relations, this leads to the following consequences:
Export is cheaper
If the price of the goods produced inside the country does not change (constant costs), when the export value of the national currency in the reserve, the price becomes lower. The fall in the value of exports makes it more competitive and increases its volume. In addition, the depreciation of the national currency may cause the demand for denominated in the national currency assets.
Imports more expensive
The price for the imported goods when transferring from the reserve currency into the domestic currency increases. This causes an increase in domestic prices and reducing demand for imported products. In many cases, this leads to a reduction in consumption of imported goods and reduce the number of any operations that require the exchange of the national currency, for example, tourist trips.
Inflation is accelerating
Growth in import prices causes inflation. Many believe that under normal circumstances a small inflationary rise contributes to increased total demand and GDP growth.
The balance of payments deficit is reduced
As exports grow and imports declining, the income may exceed expenses and the balance of payments improves. An example of this situation is Japan, regularly devaluing their currency.
It would seem that neither of these events does not look especially threatening. But do not settle. In the Humanities, Economics is no exception, the overall findings are usually accompanied by a large number of reservations that can completely change their meaning. In this case the effects listed, more precisely, the degree of their manifestation greatly depend on the causes of the depreciation of the national currency.
The reasons for the fall of the national currency
1. Falling prices for the main export goods of the country or the narrowing of markets.
The less diversified the exports, the more you can depreciate the currency. Falling prices for export commodities leads to a reduction in export earnings and is an indicator of lower demand for these goods. At the same time as it becomes more expensive import, the firms are forced to spend more of the domestic currency, buying more reserve currency, a proposal which reduced. With the growth of demand and supply reduction, the price of the reserve currency is growing, which means the simultaneous fall in the price of the national currency.
2. The worsening balance of payments.
Occurs in case of excess of spending over its revenues. Reasons can serve as faster growth of imports compared to exports, the growth of external debt or payments on its service. With the growth of the balance of payments deficit of the reserve currency reserves are being depleted faster than happen its receipt. This leads to increased demand and higher prices.
3. The Central Bank reduces the discount rate.
Reduces profitability of investment, leading to an outflow of capital, causing a rise in demand for reserve currency.
4. Central Bank intervention.
In an effort to increase foreign exchange reserves, the Central Bank can make large purchases of reserve currency on the exchange, thereby increasing the demand and increasing the supply of national currency.
5. The actions of speculators.
In anticipation of the above events, speculators can play on the slide.
The impact of these causes in each country can lead to very different consequences of devaluation of the national currency. They can cause inflation to 3%, and can in 13%; can stimulate the growth of domestic production at the cost of imports and can lead to a reduction in investment; may cause an increase in the current account surplus, but it may also lead to the growth of the deficit.
Will fall, the only question is the speed
Predictions about the future of the ruble, which existed until recently, ranged from cautious optimism to relative stability. Information about possible sanctions dramatically changed the mood of the experts, who now are far from optimistic. They have good reason to be.
Possible consequences of the introduction of new sanctions
The most serious consequences for the Russian economy, and hence for the ruble could lead to a ban on debt service, the sale of Russian high-tech products for the oil and gas industry and exports of petroleum products in the United States.
1. A significant reduction of the markets for the main export goods – oil and oil products.
Russian companies will have to seek new markets for 500 thousand barrels of oil and oil products per day, supply in the US today. However, if they apply to Asian and European markets, the situation really will be catastrophic, as in this case, will have to find new buyers for 5 million barrels. Given the high competitiveness of the oil market, find them to be very difficult.
2. Significantly increasing the cost of servicing external debt.
Now, in order to sell even half of the planned government bond, the government had to significantly increase their profitability, which means the cost of credit resulting from the sale of securities. This means that already the budget deficit would be an additional burden. Service the increased deficit will cause a rapid growth of inflation, as the government will have to print Fiat money. According to experts, the City Bank, the rising bond yield of 2% would increase inflation by 5%.
3. The reduction of oil production and petroleum
A ban on the export of equipment for the oil industry can stop the implementation of projects for modernization of the sector and the development of new fields. Especially if it is supported by the European suppliers. In addition, companies will not be able to change obsolete equipment, which will inevitably lead to production cuts.
Disappointing forecasts regarding the future of the ruble a few days ago was published by the experts of Danske Bank. They believe that in the case of the adoption of the law on sanctions, the ruble may fall to 72, and the Euro to edge up to 83.5. Most worryingly, this situation has still not commented on neither the Central Bank nor the Ministry of Finance of the Russian Federation.