Russia Moves to ‘Controls Lite’ to Manage a Plunging Ruble

An overlooked part of the currency crisis: that oil and metals exporters have been ordered to repatriate earnings. Are harsher moves ahead?


On December 15 the Central Bank of Russia (CBR) seized the world’s attention with a dead-of-night 650-basis-point hike in its key interest rate, to 17 percent. The shock measure was aimed at stemming panic selling of the ruble, which had fallen by as much as 11 percent against the U.S. dollar in the previous day’s trading. A no less important — though less publicized — move came the next day, when Russian Prime Minister Dmitry Medvedev summoned chiefs of a dozen principal Russian exporting companies to his office to lay down the law on the ruble.

The hoarding of hard currency by oil and metals giants has been an underappreciated factor devaluing the ruble, analysts say. “With almost no supply of forex in the market other than the currency sold by the CBR, even a very modestly sized purchase order could have caused the ruble rout,” says Tatiana Orlova, the chief economist for Russia at Royal Bank of Scotland Group in London. In public remarks before the December 16 meeting, Medvedev urged the corporate bosses to start converting their earnings into rubles “rhythmically and stably.” To ensure they follow through, he demanded that daily reports be filed with the central bank and a task force headed by Deputy Prime Minister Igor Shuvalov, the government’s senior economic overseer.

The joint initiatives by the central bank and the premier, plus an announcement from Russia’s Ministry of Finance (Minfin) that it would sell up to $7 billion on its own books from taxes collected in hard currency, calmed markets momentarily. The ruble rallied explosively on December 17 and the next day closed near the previous week’s levels. The ruble also rallied significantly against the dollar and euro the weekend of December 20 and 21. The moves heralded a new, multipronged strategy for managing the ruble, a task that was previously left exclusively to the CBR with its traditional instruments of raising rates and selling currency reserves. Although investors have wondered whether Russia would reach for capital controls in place of these market mechanisms, events this week indicate a more subtle approach — a sort of “controls lite” that the Kremlin hopes can tame volatility without resorting to the kind of money embargo Malaysia imposed in response to the late-1990s Asian financial crisis.

If exporters cannot be informally persuaded to repatriate earnings “rhythmically,” the State Duma, Russia’s lower house of parliament, is considering a bill that would require them to disgorge 50 percent, a regime that existed until 2006. Russian authorities are also thinking about limiting hard currency purchases by individuals. Retail savers increased the volume of hard currency and precious metals accounts by an ominous 13 percent in November, whereas ruble deposits declined slightly, according to CBR data. Other possible defensive measures include increased reserve requirements on open forex positions held by banks, or a punitive Tobin tax on currency trades, says Alexei Yegorov, a senior analyst at Promsvyazbank in Moscow.

The Finance Ministry is dangling attractive carrots at the end of these sticks for major Russian banks, suspects Per Hammarlund, chief emerging-markets strategist at Skandinaviska Enskilda Banken (SEB) in Stockholm. “It’s likely that Minfin is offering funds cheaply to some banks on the condition that they will buy rubles, and providing some guarantee that they won’t lose money,” he says.


Russia seems capable of walking a technocratic fine line, using state muscle to support the ruble without turning to the kinds of capital controls that would mark it as a long-term financial outlaw in the Malaysian mold. “Foreign investors should only be concerned about controls that could impact interest and dividend payments, direct investment and debt flows,” Alina Slyusarchuk, Russia and CIS economist for Morgan Stanley in London, wrote in a research note. She sees a “strong case for” conversion requirements on exporters, while also noting that “many countries restrict individuals from opening accounts or taking loans in forex.”

Hammarlund also approves of the strategy so far. “It is definitely a cause for optimism to see determined action by the Russian authorities, not just the CBR,” he says.

But this action, even backed by Russia’s $415 billion in currency reserves, will prove to be little more than a Band-Aid without shifts in the two fundamental conditions weakening the ruble, languishing oil prices and Western sanctions stemming from Moscow’s involvement in Ukraine, analysts say. “The measures will be sufficient for a few weeks, maybe a month or a month and a half,” writes Anna Bodrova, senior analyst at Alpari, one of Russia’s most popular online platforms for currency trading. “But we need to cure the illness, not arrest the symptoms.”

During his annual year-end press conference on December 18, President Vladimir Putin dimmed any hopes that the ruble crisis would soften his stance on Ukraine. He likened Russia to a bear whose enemies “will always try to chain it. After they chain it, they will rip out its teeth and its claws.” Having made clear his position, he said he anticipated no end to the West’s effective financial blockade of Russia and warned his nation to be prepared for two more years of economic decline.

Central Bank governor Elvira Nabiullina foresaw similar difficulties ahead, though in less graphic language. “The weakness of the ruble is a signal to the Russian economy to adapt to new conditions,” she told official press agency TASS after her dramatic rate increase. “We really must learn to live in a ruble zone, counting for the most part on our own sources of financing.”

The CBR has forecast that Russia’s economy could contract by 5 percent next year if oil stays at its current level of about $60 per barrel for benchmark Brent crude — and that was before the interest rate hike in the middle of the night. Whereas Russian banks carry mostly short-term loans whose rates can be adjusted upward with their own borrowing costs, the jump is sure to increase nonperforming loans, which already hover at a dangerous 7.5 percent system-wide, SEB’s Hammarlund says.

“What we did reflects a choice between the bad and the very, very bad,” Sergey Shvetsov, the CBR deputy governor who oversees financial regulation, told the newspaper Vedomosti. “It could have consequences for the financial market that I will not try to exactly predict.”

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