Crisis Side Effects Could Net Billions for Kremlin
A drop of 1 ruble in its exchange rate to the dollar gives state coffers an additional 180 billion rubles ($5 billion) of revenues
Published: March 5, 2014 (Issue # 1800)
A cheaper ruble and more expensive oil could actually go a long way in improving Russia’s economy, possibly offsetting other potential aftershocks of the Ukraine crisis.
U.S. Secretary of State John Kerry in interviews on Sunday identified the ruble’s slide as among Russia’s economic challenges that could get worse if Western powers retaliated economically for a takeover of Ukraine’s Crimea peninsula by armed men thought to be Russian troops. He was speaking after President Vladimir Putin won unanimous approval from the parliament to use armed forces in Ukraine.
Related: Ruble and Stocks Tumble on Ukraine Turmoil
The currency declined further in Monday trading, but a ruble that is losing value is a great prop for struggling local manufacturers, which now find themselves more competitive with Western imports. Besides, oil prices that edged up about $2 a barrel Monday are creating additional income for a federal budget that depends on these revenues heavily.
“Some of the consequences [of the Ukraine situation] can be for the better,” said Oleg Kuzmin, an economist for Russia at investment bank Renaissance Capital. “First of all, it is the weaker ruble, which will … slow down the growth in imports.”
Related: Ruble Falls to Lowest Level Against Euro Since 2009
At the same time, Kuzmin warned that a devaluation that was too fast would come as a shock to businesses and the general public, casting doubt on economic stability. The Central Bank intervened in Monday currency trading with all its might and largely restrained the ruble downfall. Its official ruble exchange rate for Tuesday was only 19 kopeks more per dollar, an increase of about 0.5 percent.
In another effort to keep a lid on the exchange rate, the Central Bank temporarily raised its interest rates Monday, thus restricting access by banks to the money supply, which could end up being used to buy U.S. currency. If the measure lasts for more than a month, it could further chill the country’s sluggish economic growth, Kuzmin said.
The effort comes despite the fact that a drop of 1 ruble in its exchange rate to the dollar gives state coffers an additional 180 billion rubles ($5 billion) of revenues, he said. The Central Bank set the exchange rate at 36.4 rubles per dollar for Tuesday, compared to the government’s estimate of 34 rubles on average for this year.
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