SURVEY: Russian ruble: soft landing or freefall
MOSCOW. Dec 25 (Interfax) - The economic situation in Russia, as in the rest of the world, still has a long way to go before it stabilizes, and analysts' forecasts remain fairly foggy.
The views of analysts at investment firms are sometimes so diametrically opposed that it is very difficult to reach any kind of consensus. They differ not only on what the oil price will be next year and the rate of economic growth in Russia, but also on how the authorities should act to avoid a deepening of the crisis.
For example, analysts have two completely different views regarding the desired rate at which the ruble should be devalued and the future consequences of the Central Bank's current exchange rate policy.
Slow depreciation of the ruble: a waste of time?
Most of the analysts surveyed by Interfax think that the incremental devaluation of the ruble's exchange rate against the dollar/euro basket is a waste of time and money.
Analysts at investment bank Troika Dialog (RTS: TROY), for example, characterize the policy of gradually weakening the ruble as the "wrong steps in the right direction" and do not see any reasons yet to change their mind.
Troika Dialog chief economist Yevgeny Gavrilenkov said the slow depreciation of the ruble increases the chances that the economic slowdown will continue, because while the exchange rate continues to fall just as predictably banks and other investors will continue to hoard foreign currency. This process will not stop until the ruble finds its new balanced value, where speculation on expectations of its devaluation becomes pointless.
The most natural way to find this balance is to make the transition to a floating exchange rate policy (ideally accompanied by an interest rate hike - ed.), although it is possible to continue the current policy of gradual devaluation managed by the authorities, Gavrilenkov said.
But the latter option is far more expensive: by trying to outplay the market, the Central Bank is not only reducing its foreign currency reserves, but also furthering the economic slowdown, as money does not circulate normally amid expectations of devaluation, he said.
Alfa Bank (RTS: ALFB) chief economist Natalya Orlova said the Central Bank's decision to gradually weaken the ruble is worse than both a sudden devaluation and propping up the exchange rate at a stable level.
In the former case, the Central Bank could have preserved its reserves at the former level and not given speculators time to run to the dollar, she said. But this would have devalued people's savings, fanned inflation and provoked a run on deposits. On the other hand, supporting the ruble at the previous level would have preserved ruble deposits at the cost of further depleting reserves. However, the in-between decision of gradually devaluing the ruble has not prevented the depletion of reserves and has spurred the flight from the ruble.
UniCredit Aton analyst Vladimir Osakovsky said the ruble should be devalued immediately, despite the fact that this might be painful in the short-term due to increased volatility of the exchange rate. But this measure would make it possible to stabilize the balance of payments, minimize further loss of reserves and put monetary policy back on a normal course, he said.
If the ruble were to be set free right now, it would depreciate by about 10%, Osakovsky said, adding that this was a fairly optimistic scenario.
Negatively consequences of incremental devaluation include continued capital outflows, flight from the ruble in anticipation of further depreciation and pressure on reserves, he said.
In addition, it is virtually impossible to conduct any sort of lending policy under these conditions, particularly in the banking system - ruble loans are, in most cases, not being issued, he said.
Osakovsky said that if the Central Bank "releases the ruble into free float" the situation would stabilize within a few weeks, if not days. He said it was difficult to predict when this might happen, but it could be within the next few months.
Analysts at Alfa Bank, under a basic scenario, forecast that Russian GDP will fall 3% in 2009.
Troika Dialog forecasts that if the oil price will be $30-$40 per barrel in 2009 and the government continues its strange behavior on money markets there will be an increased chance of economic contraction, possibly by as much as 4-5%.
However, Troika analysts are not yet prepared to completely abandon their earlier view that the Russian economy could grow by 4-5% in 2009, but this scenario, once considered the most probable, is gradually moving into the category of theoretically possible.
There is still a chance that Russia's GDP will grow in 2009, but for this to happen the government must have the decisiveness to abandon tight control over the ruble's exchange rate, in January-February at the latest, Troika analysts reckon. The longer it manipulates the currency and money markets, the less realistic this scenario becomes, they said.
Osakovsky also said a 3-4% drop in GDP next year was quite realistic if the ruble's exchange rate remains controlled. If there were a one-off devaluation with a transition to a floating exchange rate, a sharp economic decline could be avoided with certain support for exporters, import substitution and the revival of lending in the banking sector, he said.
In search of the golden middle
Virtually all analysts say that a devaluation of the ruble is necessary in order to bring the exchange rate in line with current oil prices. But some see a sharp devaluation as an extreme measure that could have unpredictable and unmanageable negative consequences. Therefore, they see the Central Bank's current policy as a "golden middle" between tight control over the exchange rate and allowing it to change with market conditions.
Analysts at Renaissance Capital think an immediate switch to a floating exchange rate would be a bad idea in the current circumstances.
The 1998 financial crisis established a firm link in Russians' minds between devaluation and a banking crisis. Therefore, a sudden devaluation of 20-30%, which would be unavoidable with a transition to a floating exchange rate, would lead to a run on bank deposits combined with the conversion of ruble savings into dollars or euros. Such a turn of events would be extremely dangerous for two reasons: banks would immediately lose most of their retail deposits (6 trillion rubles), which would lead to the necessity of banning early withdrawals, as the Ukrainian authorities did in October; and bank offices and currency exchange outlets would run out of dollars, leading to the emergence of a black market in currency. All this is very dangerous in terms of social stability in the country, Renaissance Capital said in a report.
In addition, covenants on debt levels at companies and banks could be violated, allowing creditors to immediately call in foreign debts, the investment bank said.
The analysts reckon an alternative transition to a floating exchange rate is the Central Bank's current policy, an incremental depreciation of the ruble against the dual-currency basket through expansion of the trading corridor. The advantage of this policy is the absence of sharp fluctuations and, consequently, no dramatic acceleration in the flight of bank deposits, as well as flexibility in determining a further course of action depending on the situation on the global commodities market capital markets.
It was the preservation of a stable exchange rate for the yuan in 1997-1999, amid a massive devaluation of the currencies of other Asian countries, which led to the considerable strengthening of China's position on global financial markets, the analysts said.
However, they said, this approach also has a number of major shortcomings, chief among them increased expectations of future devaluation, regardless of whether it is gradual or sudden.
Renaissance Capital analysts think it would be good to have a one-time sharp devaluation of the ruble, by 10-15%, while maintaining control over the range of its fluctuations against the dollar-euro basket, and a subsequent gradual, smaller depreciation of 5-10%.
Such a policy, like the option of switching to a free exchange rate, would eliminate expectations of devaluation in future, thus stopping and possibly reversing capital flight; support the conditions for providing liquidity to the financial system and real sector; and lead to a reduction of interest rates, the analyst reckon. The devaluation would not be uncontrolled, which should minimize the risks of a run on retail deposits.
Nonetheless, this approach also has its shortcomings, chief among them less flexibility in terms of setting the exchange rate in future, because if the trade climate deteriorates further the successful repetition of such a policy is unlikely, the analysts said.
The best option in the current conditions, according to Renaissance Capital's analysts, is to maintain the existing corridor for the ruble's fluctuations against the dollar/euro basket until speculative pressure on the Russian currency abates, and then resume a gradual transition to a floating exchange rate.
However, it should be stressed that Renaissance Capital's forecast for Brent crude in 2009 is $70 per barrel, and the bank expects oil prices to continue rising in future.
An analyst at financial corporation UralSib (RTS: USBN), Vladimir Tikhomirov said a gradual devaluation of the ruble, particularly against the U.S. dollar, allows the Russian government to maintain the public's confidence, which mitigates the outflow of funds from retail deposits.
A sharp devaluation could seriously destabilize both the economic and political situation in Russia, he said. It could destroy confidence in currency policy, both of the public and investors.
Furthermore, gradual devaluation will not have major negative consequences for the country's economy, Tikhomirov said. The Central Bank is not spending so much on propping up the ruble for this to become a reason to question its actions.
"The reserves have also shrunk due to revaluation of currencies, and as a result of aid for the corporate sector to pay off foreign debts," Tikhomirov said.
History shows that previous sharp devaluations of the national currency occurred in a completely different macroeconomic environment, when reserves were depleted to a critical level and there was a de facto establishment of a black market for currency, meaning the official exchange rate did not reflect the real one. Nothing of the sort is currently happening in Russia, Tikhomirov said.