The ruble, hit another all-time low against the dollar Tuesday on the back of a report by Bloomberg that the Central Bank of Russia is considering the reintroduction of capital controls to stem the flood of money out of the country.
The move was short-lived for once, as the story was denied by Finance Ministry officials (and later by the CBR). It also goes against the latest comments by both CBR head Elvira Nabiullina and her deputy Sergey Shvetsov. But with every week that goes by, the rumor is gaining credibility by refusing to go away, while the denials are correspondingly, if unfairly, cheapened by repetition.
It isn’t hard to see why. Even the government expects over $100 billion of capital to leave the country this year, as foreign investors pull out and domestic ones rush to put their assets beyond the reach of a state which they fear will be tempted to grab them if it feels it needs to. Fitch Ratings Agency estimates capital flight could actually reach $120 billion this year.
Russia’s main economic indicators are generally heading in the wrong direction: the CBR expects economic growth to slow to 0.4% this year from 1.3% last year; inflation has risen from 6.1% at the start of the year to 7.6% in August, as a ban on imported European and American products has driven food prices higher. (This despite the fact that global prices for grains and sugar are close to multi-year lows.)
The government now admits that western sanctions are hurting, and the prospect of an early end to them is vanishing small. That’s due mainly to a slow but increasingly clear and firm turnaround in thinking in Berlin, where German Chancellor Angela Merkel, the de facto leader of Europe, warned Monday that the continent should prepare for a chill in relations lasting not months or years, but decades.
“We needed 40 years to overcome the German Democratic Republic,” Merkel told a press conference in a reference to her own childhood and youth. “Sometimes in history you have to have a long view, and not just ask after four months whether it makes sense to keep up a demand.”
E.U. ambassadors Tuesday voted to keep all of the current sanctions in place.
“Nobody even talked about the possibility (of lifting sanctions), given the situation on the ground,” Reuters reported.
Despite promising a ceasefire, Russian-backed rebels are no longer making any attempt to conceal their attacks on Ukrainian army positions (such as this close to Donetsk airport) in the disputed regions of Ukraine, whose defense ministry reported nine servicemen killed in the last 24 hours Tuesday.
Even if the political climate doesn’t improve, Russia has plenty of firepower left to defend the ruble. Foreign reserves may have fallen by 13% in the last 10 months, but they are still a whopping $458 billion. In 2008, when the country faced a far worse refinancing crisis, it absorbed a $200 billion run on the ruble with barely a blink.
Both the budget and current account may have weakened since then, but both are still in surplus, so the government is under no pressure to borrow (government debt is in any case a puny 13% of GDP). Additionally, the further the ruble falls, the more social spending can be funded by one petrodollar of tax revenue.
And, crucially, Russia does have other sources of finances. Silvia Merler, an analyst at the Brussels-based think-tank Bruegel, points out that Chinese lending to Russia “literally exploded” in the first quarter of this year, even as the west started to pull its money out.
But there are limits to the CBR’s flexibility (and to the generosity of a Chinese financial system that has its own issues to worry about). President Vladimir Putin has built his popularity over the last 14 years on increasing Russians’ purchasing power, and the authorities know that keeping that purchasing power–in the form of a stable exchange rate–is key to keeping political stability.
Putin only liberalized the capital account in 2006 under the guidance of his first finance minister, Alexei Kudrin, whose phenomenal success in delivering budget surpluses validated western-style liberalism in Kremlin circles, at least for a while.
But Kudrin left in 2011, and the dominant mindset has become more statist in its outlook. With private investment only going in one direction, the Kremlin could easily feel it has nothing to lose by re-imposing controls. Putin neutered Russians’ ability to vote against him at the ballot box long ago. Neutering their ability to vote against him with their money would only be a logical extension of that.
