MBS Blog

As we have been reporting on this space, the Russian and Ukrainian currencies have been declining along with their economies. While Russia has been able to stave off a complete collapse due to the foreign currency reserves it holds, it is only a matter of time before the ruble descends to much lower levels.

For now though, the Russian Government has managed a slower depreciation. When the foreign reserves decline further, and oil & gas prices continue their current trend, capital flight will accelerate in 2009. This will force the ruble lower. 

For Ukraine there are fewer options. No cash reserves or oil resources means that Ukraine is subject to the whims of a volatile market in crisis. The recent emergency loan from the International Monetary Fund (IMF) to Ukraine stabilized the markets here to a great extent, but the real stabilization will come when the market hits bottom and government reforms. The loan from the IMF in fact, was contigent on reforms. 

As for 0900 this morning of Friday the 19th of December, the Ukrainain currency-the hyrvnia (UAH) is selling at 7 to 1 U.S. dollar at local kiosks here in Odessa. Yesterday it was at 10 to 1 U.S. dollar.

As we have mentioned in an earlier post on this blog, it is a seasonal ritual.  During the holiday season or summer tourist season, the Ukrainian Government shores up the hryvnia against foreign currencies. This past summer for example, the hryvnia was at 4.6 to 1 U.S. dollar. As soon as the tourists departed, it went back up to the 5 to 1 U.S. dollar rate where it had been averaging for the past several years in a tight trading range or “peg.”

In the end, neither the Russian or Ukrainian Governments will not be able to over-rule the markets.

Technorati Tags: Russia, Ukraine, U.S. dollar, Anton Olff, currencies, Odessa, ruble, hyrvnia, UAH, International Monetary Fund, IMF, economy, foreign reserves, foreign currency, Russian Government, depreciation, oil, gas, capital flight,

Russia’s economy is captive to oil & gas prices. If the price of crude continues to decline-and there is sufficient reason that it will continue to do so-then the prospects for Russia’s economy must also be adjusted.

Most Russians have painful memories of the 1998 financial crisis. It is one of prime motivations behind the Russian Government’s aggressive stance regarding the ruble. The political backlash of a currency rout could be devastating.

 As this article from the Financial Times (www.ft.com) states, Russia is now in a much better financial position compared with the 1990s. However, at the rate that the Russian reserves are being utilized, the Russian Government may not have sufficient ammunition to counter any new economic shocks.

At some point, the Russian Government might consider even closer ties with cash rich China.  These might include the sale or long term leasing of strategic assets located in Siberia.

Rouble exodus hits Russia credit rating

By Catherine Belton in Moscow

Published: December 8 2008

Russia on Monday became the first G8 country since the start of the financial crisis to have its credit rating downgraded after Standard and Poor’s took fright at the recent exodus from the rouble and sharp drop in oil prices.

S&P said it had lowered Russia’s foreign currency credit rating by one notch from BBB+ to BBB because of the “rapid depletion” of the country’s foreign exchange reserves and the “difficulty of meeting the country’s external financing needs”. It said the outlook for the rating was negative.

Russia’s reserves have fallen by $128bn since August to $455bn, as the country battles the capital flight that began following the war with Georgia and escalated as the oil price fell and the global crisis worsened.

S&P said Russia could be forced to spend all $200bn now parked in its two sovereign wealth funds on recapitalising the banking system and covering fiscal deficits in 2009 and 2010.

The agency expects Russia to run a current account deficit next year of 2.6 per cent of gross domestic product due to the oil price fall, putting further pressure on the balance of payments.

“There are a lot of layers of concern,” said Frank Gill, primary credit analyst at Standard and Poor’s. “There are macroeconomic and political risks . . . and Russia has not operated a current account deficit since 1997 and that was less than 1 per cent of GDP.”

Vladimir Putin, Russia’s prime minister, has staked his political credibility on avoiding a sharp rouble depreciation.

The thought of devaluation raises the spectre of the 1998 rouble crash that wiped out Russians’ savings, although economists say any devaluation this time.

Technorati Tags: Russian, ruble, Georgia, Vladimir Putin, current account deficit, Frank Gill, political risks, capital flight, credit rating, G8, Catherine Belton, Moscow, Standard and Poors, Financial Times, GDP, www.ft.com, Anton Olff, Russian Government, Russian economy, oil prices, 1998 financial crisis, currency devaluation