Russian Currency Continues to Fall as Recession Looms

Sources: Bloomberg, Ruble Falls Most in 10 Years This Week After Five Devaluations; Pravda, Russia's Economy May Not Grow in 2009 At All; The Moscow Times, Putin Orders Budget Revised at $41 Oil

The downward slide of the ruble shows no signs of stopping, reaching its lowest point relative to the dollar since 1998, the year of Russia's financial crisis and Great Default, on Friday. The Central Bank's strategy is not to greatly devalue the currency all in one sweep, but instead to adjust in increments, seventeen times in the last two months alone. Though Russia had the benefit of large foreign currency reserves at the start of this crisis, it cannot afford to use them defending the ruble indefinitely. The Central Bank reported on Thursday that reserves have fallen to $426.5 billion since August, a twenty-nine percent decrease.

The currency is expected to continue its decline for some time before its rate relative to the dollar bottoms out, and this is not Russia's only economic concern. With $80 billion of foreign debt due this year and few refinancing options in the shaky global financial climate, Russian companies may be in trouble. The price of the main oil blend that Russia exports is down sixty-eight percent and falling from a record high in July, and Russian economists are looking at recession for a country that appeared almost untouchable as late as the middle of last year.

Finance Minister Kudrin admitted today that the rate of inflation is expected to reach thirteen percent in 2009, while the growth rate is expected to slow to a rate of zero to two percent. Kudrin expects that the peak of the crisis for Russia will occur in 2009, and stated that Russia is willing to increase the budget deficit in this period, as long as it does not exceed four to five percent of the GDP. The slowing of growth comes from a rate of six percent in 2008, which was lower than expected due to the arrival of the global financial crisis in Russia late in the summer.

Prime Minister Putin ordered a revision of the current budget on Monday to take into account these unexpected slowdowns in the economy, particularly the fall in the price of oil. The existing budget assumes a $95 per barrel price, whereas the revisions will assume $41 per barrel. This change is extremely important, as oil revenues account for forty percent of the Russian budget, bringing in both taxes and export duties. The government will have to shift focus from an expected budget surplus to a deficit, and cut spending accordingly. However, some of the Reserve Fund – a fund created from the high oil-and-gas-driven surpluses of recent years – will be spent in 2009 to accommodate this shift.

Questions:

1) Do you think Russia is doing enough in response to the crisis, or should leaders consider a more drastic one-time devaluation and/or major spending cuts instead of a gradual approach?
2) Will the Reserve Fund, the National Wealth fund, and foreign currency reserves be sufficient to provide a cushion for such a drastic shift in the Russian economic situation, or will low oil prices eat up these reserves and create a situation for Russia similar to that of the 1990s?