February 8, 2014

The Russian Ruble Goes for Gold

The following is a guest post from Blake Hall, a senior majoring in Political Science-Economics at Anderson University. He is preparing to begin graduate study in business. His research interests include global finance, global political economy, investment strategy, and emerging markets. You can follow him on Twitter @SBHall765.

Lights. Camera. Action. The Sochi Winter Games began Thursday with the opening ceremony scheduled for Friday evening. What a spectacle for Russia and my key player is the Russian Ruble, will it be able to achieve gold as direct result of the games or will it be another drag/bust on the already ailing economy?

The value of the Ruble has been steadily declining to the 52 week low of 35.56 per 1 US Dollar earlier this week. In the New Year alone the Ruble has fallen a staggering 7.6% versus the USD. The financial contagion of emerging market investments has fueled a widespread drop in investor confidence and has seen the rapid flow of cash out of these instruments. Fear of prolonged market correction is prompting many financial institutions to lessen their emerging markets positions. The ripple effect can obviously be seen in the sudden decline of the MICEX score. Looking at this broader indicator the MICEX, a cap-weighted composite index that compiles the 50 most liquid Russian stocks, as of January 21st showed 1504.68, it then saw a dramatic pull back to a current 1456.00. Another factor contributing is the ending of the Russian Commodity boom times. As 2010 saw growth rates in the 4-5% range the most current growth rate data shows only 1.3%. Lagging growth and the sudden lack of available capital is putting strain on an economy already near the tipping point.

Shaun Richards, an independent economist and columnist, points out, “The Bank of Russia has been intervening on a consistent basis to support the Ruble since April of last year. This is yet another timetable that coincides with the beginning of the ‘taper’ debate about the actions of the US Federal Reserve. The pace picked up in January as it found itself buying some US $7.8 billion and 586 million Euros in support of a weak Ruble.” This is not behavior which is out of the ordinary for the Bank of Russia. In fact, the Bank’s operations are structured in this fashion, but what is a rising red flag is that purchases of Rubles have been lacking for some time whereas sales have not. A major consequence of the Banks action is that the international reserves are on the decline. US currencies totaled $537.6 billion at the start of 2013 but are only $496.7 billion currently. As I mentioned this is only the red flag being raised, not high and beckoning immediate action. Yet with the sustained fall in oil prices, it might show matters are taking a turn for the worse. In comparison some experts suggest that the effects are being driven not by a weakness in the Ruble, but the dollar and Euro’s recent rebound and strengthening in relation to emerging market currencies, which is causing the discrepancies.

So will the impact of the games be positive? In many ways it already should have been so, as much of the estimated $50 billion US that was spent on new stadiums and infrastructure in the Sochi area would have been calculated into the figures provided above. Inflated consumption data and tourism addition to the markets will only present a small spike in financial data points. One should also consider the rampant corruption which plagues the markets and economic data coming out of the country. To conclude, the Winter Olympics is certainly a smaller scale than a summer one, but the Sochi Games will be the most expensive Olympics to date. This being said we can conclude that while there are plain and minor economic effects from an Olympics, the hype and promotion about the economic impact will far exceed the reality. 

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