On Thursday, August 22, the Russian ruble hit a two-year low of 32 rubles per $1. The fever on the Russian currency market was caused by declining stock markets in Asia, Europe and Russia itself. Experts predict that Russia's currency will continue falling, citing an absence of domestic or foreign factors that would strengthen it.
Ruble tumbles with stock markets
The pre-crisis situation in the global economy has speculators on high alert. The jittery atmosphere is causing players to overreact to any news, good or bad, resulting in spikes and dips on stock markets.
The latest round of speculator pessimism was caused by the U.S. Federal Reserve's announcement of a new stimulus plan on September 21. "Investors expected the FRS to take more decisive measures, but it hasn't," Kirill Tremasov, head of analytical department at the Bank of Moscow, told RIA Novosti.
As a result, Asian stock indexes lost 2%-4.9% on Thursday, while Hong Kong's key index, Hang Seng, was down 4.85%. In Russia, the MICEX index fell by 5.8% from the previous closing to 1420.63 points. The RTS index lost 6.4%.
The Russian ruble declined in the wake of these stock market dips. This is understandable: fearing a new wave of crisis or, at least, a slowdown in global economic growth, investors are fleeing from risky assets, which include stocks of developing markets and currencies of commodity-based economies (including the ruble). The ruble's decline was compounded by the fact that oil prices began falling at a faster rate following negative forecasts and the FRS plan released the day before. By midday on September 22, WTI lost about 3.5%.
Domestic factors also contributed to the ruble's decline. The ruble is significantly overvalued against the bi-currency basket of the euro and the dollar, says Yelena Matrosova, head of the Macroeconomic Analysis Center at the BDO Unicon. She points to the difference between the ruble's actual rate and its calculated rate (the ratio of money supply to the Central Bank's international reserves). Normally, the calculated rate should be above the nominal one by 10%-12%, but the gap was 29% already in early August, Matrosova says.
"The ruble was on the verge of a decline by the end of summer; any instability on the market could have pushed it over the edge," she concludes.
Greek thorn
The economic trends are unlikely to reverse drastically in the near term. The fundamental reason for the economic instability and tensions on the stock market is the unresolved Greek debt crisis, Tremasov says. Until European officials decide what to do with Greece's economy and how to get the country out of the hole, the global economy will remain on the brink of a new crisis. Which means that commodities and commodity currencies will not be too attractive for speculators.
Both the ruble and the euro will come under pressure from a rising U.S. dollar. The United States is beginning to gradually give up its policy of quantitative easing. Banks, spoiled by ample dollar liquidity in recent years and fearing a shortage of dollars, will start selling their assets in order to replenish their reserves of the U.S. currency.
The ruble may be further weakened by increased demand for the dollar and the euro on the part of Russians, as experts are predicting, and by growing budget spending, which is typical for the end of the year in Russia. Even political squabbles ahead of the election could result in additional outflow of Russian capital, further weakening the Russian currency, Matrosova warns.
Experts, however, hope that the authorities will not allow the ruble to fall too low. "I believe that at some point, if the ruble falls by another 5 percent against the bi-currency basket, the Central Bank may take a more active role," Matrosova says. But she recalls that the regulator has identified inflation targeting as its top priority as opposed to maintaining the ruble's exchange rate.
The views expressed in this article are the author's and may not necessarily represent those of RIA Novosti.
