Vladimir Tregubov is assistant professor at National Economy chair of Economics Department of the Russian Presidential Academy of National Economy and Public Administration under the Russian President, lecturer at the Banking Institute of the Higher School of Economics, and an independent financial consultant
Is there any point for Russians holding bank deposits in US dollars to be concerned about their savings? Since US dollar is a major currency for payments under international contracts, and banking transfers are nowadays effected via banks in the USA, corporate clients’ outflow may be expected. The banks’ financial stability can therefore diminish. A report published on August 16 by Fitch agency, assesses that Russian banks can stand a ruble exchange rate reaching RUR 70/$1 without any substantial decrease of their capital adequacy ratio. If an exchange rate exceeds RUR 80/$1, a lower adequacy ratio or some other Central Bank’s assistance will be required. It should be remembered that in the financial markets there are instruments ensuring a 6% to 9% hard currency yield per annum.
It is clear economic sanctions are a long-term instrument to exercise pressure on Russia. Unlike initial sanctions (prohibiting entry to the US to some individuals, etc.), the current ones are specifically targeting Russia’s economy and financial system. Experts believe, national currency devaluation will accelerate since global prices at the natural resources markets are going over their peak figures which is evidenced by a substantial drop in copper prices. The copper price is a forward indicator setting the global economy prospects.
The same applies to the oil prices which have a direct impact on the ruble exchange rate. Besides, various officials have repeatedly stated that a weaker ruble is a way to pour more money (in face value) into the state budget and to thus guarantee social allocations. Given the current dramatic drop in ruble’s value, there seems to be no point to increase retirement age, as the authorities suggest, since financial resources in absolute figures will be abundant.
It should be remembered the current executives of the Central Bank have been following a new monetary policy. Instead of maintaining the national currency’s stable exchange rate as required by the federal law on the Central Bank, it has been targeting inflation. The matter is, there are various instruments of assessing inflation. Besides, inflation rates vary for different social groups. The recent fuel hike, VAT increase, and ruble weakening all contribute to inflation acceleration. According to professional views, in case Finance Ministry had stopped purchasing foreign currencies to further increase national gold and forex reserves on April 8 whereas the Central Bank, as most national central banks would do, had launched hard currency sales in the forex market, Russian ruble’s exchange rate could have been kept at 55 to 57 rubles per USD. Yet the Finance Ministry’s purchases of hard currency only stopped in mid-August. That weakened ruble and contributed to instability of Turkish lira thus making major funds flee from these currencies and international and largest domestic institutions play against the national currency. The replica of the 2008 situation is now witnessed whith financial authorities trying to calm the public down whereas forex market players keep pressing ruble’s value.