The Russian ruble

From Neil Irwin:

As Russia has deployed its reserves to (so far unsuccessfully) stop the currency collapse, it has made traders betting against the ruble richer while leaving the Russian government poorer. Poorer by $80 billion, to be precise.

Paul Krugman has a good treatment of the basic theory, scroll through a few of his posts hereFrom Leonid Ragozin:

Many commentators were especially annoyed that the discrepancy between the ruble and other currencies means Russians are essentially barred from traveling outside the country. “So now we are under a travel ban. … They didn’t even need to introduce exit visas [like the ones people needed in Soviet times] or build an iron curtain,” Boris Yunanov, the deputy editor of the liberal New Times magazine, wrote on Facebook

The most popular vacation spots for Russians will be hurt, they left out Goa.

Let us not forget intertemporal substitution:

Retailers had to change prices multiple times to keep up with the rouble’s fall. Shoppers, on the other hand, rushed to beat the price hikes.

The main reseller of Apple in Moscow, re:Store, saw sales two to three times higher than normal at one central branch, according to a salesman, reports Jack Farchy in Moscow.

Since then Apple has shut down on-line sales.  Here are a few photos.

Kevin Drum speculates about historical parallels.  Will selling gold be their next move?  You can follow the very latest on Twitter.


I realise it is a basic principle that "No one ever learns things from Australia" because we are just a "lucky quarry", or something, but we do provide an excellent example of why you use a floating exchange rate as a shock-absorber. It is part of the reason for us having no recession since 1992. That and doing monetary policy better, but hey, that doesn't count because we are just a "lucky quarry" (but apparently only be really, really lucky after 1992).

London should be doing well, though. Or at least it will be with all of the rich Russians moving as much money there as possible out of the country.

Maybe, maybe not - Baden-Baden is one of the slightly more subtle places for Gazprom types to be parking their money, but as reported on local radio recently, a lot of Russians are discovering that their credit cards no longer work. Which just might be why sanctions may turn out to be efficient, at least at the level of making life uncomfortable for those rich Russians accustomed to not having to spend all their time in Russia - cutting off access to electronic transactions is not exactly hard, and has been noted in Baden-Baden, is becoming quite routine.

('Tiny Baden-Baden, in the foothills of Germany’s Black Forest, has a major reputation in Russia. Everyone around here will confirm this fact: the tourism board, the city marketing office, the mayor, but also the Russians we eventually discovered. Since the days of the tsars, aristocrats and tradesmen, estate owners and poets have come to take the waters and gamble in the “green paradise on the Oos River.”

While Russians today also love shopping in Berlin and Munich and other Western European cities, Baden-Baden is Germany’s most Russian city, as there are 18,800 Russian tourists a year here and an estimated 1,800 pieces of real estate in Russian hands in this town of 50,000 inhabitants. The small German spa venue even has a partnership with Sochi, and another has been added: with Crimea’s Yalta, which was part of Ukraine until the last few days.'

Baden-Baden was site of one baaaad pre-Internet chess tournament too, back in 1870 ( won by A. Anderssen, the chess master.

Bonus trivia: Bad means 'spa' in German.

How would that be 'doing well'? It will just drive up resi r/e values, which will feed through to prices of all services, and further exacerbate the polarity of wealth [already extreme].

And boost the popularity of UKIP.

Leonid Bershidsky has a good piece on an exacerbating factor, the big Rosneft bond issue. He misses that Rosneft is probably financing ruble operating costs with ruble debt in order to preserve dollar operating income to repay dollar debt. But the optics were amazingly terrible - the issue was at 11.9% just before the CBR raised rates to 17%:

I would expect to see a lot more of that. They need to generate ruble income inflation to allow people to keep up on their ruble debt interest - running around 20%. While the economy shrinks at least 5%. So they're going to keep printing and devaluing, because there is no other way to get the rubles circulating to keep the banks afloat.

Another panic spreader is that the sudden huge slow-down in spending of reserves has raised suspicions about how much are really there. It's in the public domain that about a third of so-called reserves are illiquid sovereign wealth funds and an eighth are gold, to which Putin seems personally partial. I wouldn't be surprised if he has moved it to his guest rooms and won't let anybody near it. And nobody knows if the remainder of FX reserves are really liquid hard currency assets or not. There's no IMF checking on them these days. It wouldn't be surprising if even the main body of "FX reserves" turn out to be illiquid claims on Russian stuff, such as pledged as collateral for secret loans, as Ukraine was revealed to have been doing back in 1998.

The usual suspects on TV and in print are already laying the propaganda groundwork for capital controls and/or a freeze on repayment of corporate hard-currency debt. My guess is it's the latter. Capital controls would violate a long-time informal pact between Putin and the elite that he can do whatever he wants in Russia and they can do whatever they want outside Russia. In Russia the victims of capital controls would be Russians, not foreign investors trying to repatriate income as in Malaysia. And though Putin probably has enough control of Russia these days to enforce capital controls, all that would do is stop conversion for capital flight of ruble incomes and savings. It wouldn't solve the more fundamental problem of more liabilities than assets plus projected income.

Will this finally pop the Canadian balloon?

High oil extraction costs, pipeline constraints and one of the world's biggest real estate bubbles.

No, it will pop the Texas and North Dakota balloon.

The collapse of the Soviet Union is an interesting parallel but perhaps the better one is Suez.

Russia has lost an Empire and has yet to find a role.

And so the Great Chessmaster, comrade Vladimir, savior of the Motherland, suddenly finds out something that any businessman could tell him before: you cannot buy trust with money, not even with threats of violence. You actually have to be trustworthy to earn trust.

You have your Crimea, you can eat it now.

The only 'lesson' here is, even in the age of "hope 'n change," you'd better not cross the US. "There is a Providence that protects idiots, drunkards, children and the United States of America."—but none of the places the latter goes around ruining.

"The only ‘lesson’ here is, even in the age of “hope ‘n change,” you’d better not cross the US "

You're assuming then that it is the US that controls the price of oil?

We do through the House of Saud.

So even more amusingly, your assuming we control the House of Saud. Anyone with even an inkling of foreign policy reading over the last five years would find this absurd.

@MK - here's the video you will enjoy comrade... Kronsteen was a chess master, the sign of a devious mind.

From Russia with love (1963) - Death of Kronsteen -

Goa isn't so nice for Russians these days.

Russia is a pretty big country. Why would the average Russian want to go somewhere else on vacation? Aren't there plenty of places in their own country that Russians have never visited? How many Muscovites have partied in Vladivostok?

I'd personally love to explore a lot of Russia and I think it has a lot to offer nature enthusiasts, but that Top Vacation Spots list is mostly populated by beachy, balmy places, of which Russia has few. I that is part of why Russians love Crimea so much. It has a legacy as a big time vacation spot, at least in Soviet days, though its tourism infrastructure is apparently quite run-down now.

All those facilities built in Sochi might turn out not to be such a white elephant after all.

I recently spent a month hiking and kayaking in Kamchatka. I could not recommend it enough. The Altai mountains are also very beautiful.

There is Siberian tourism campaign.

Corey Flintoff, NRR's correspondent in Moscow, reported yesterday that stores are selling out of big ticket items like washing machines and televisions, as Russians consider such assets a better "investment" than the collapsing ruble. Russians aren't blaming Putin, though, as he was once again voted the most admired person in Russia. Of course, that's equivalent to being voted the most admired person in the Ferguson police department.

Unless they are buying cars or something, why would these purchases be "investments"? Russians buy New Years gifts just like Americans buy for Christmas. I take these runs on the electronics stores as people buying stuff they are going to need anyway within the next few months. They are choosing to do it now, before the prices are increased to reflect the worsening exchange rate each day. If they are converting their long-term savings it is probably taking the form of buying dollars and Euros.

Uh, barter economy was quite widespread in the 80s, people in former USSR still remember that.

I don't think they will be doing much of that this time. Lots of access to dollars and other easier ways to save.

They buy appliances as a store of value. Much like the Argentines have done in past inflationary episodes. I had an Argentinian friend who had a room in his house in Buenos Aires filled with washing machines and refrigerators.

I guess that's one option, but why wouldn't they just buy stable foreign currency?

When I saw gold mentioned, my first thought was gold should go up as Russians move into gold. But no, the story is that gold moves down because the Russian government is expected to sell gold. Why don't they sell it to their own people? Instead of letting them buy euros or dollars, offer them a gold Russian ruble coin. It would have value both as gold and as currency.

The question is do you give the coin a denomination above or below the current price of gold in rubles? If it's way above gold, that might show a lack of confidence in your own currency. If it's way below -- which is what most countries do (including the U.S.) with their precious metal coinage -- then it's a pure gold play, except the buyer has protection against the bottom dropping out of the price of gold.

And of course, if very pressed, the government can always confiscate the coins and give you paper money in return. They did that in 1930.

Simplifying the collapse of the Soviet Union and End of the Cold War as the result of an economic crisis remains problematic. Ultimately the collapse represents a collapse of the POLITICAL system, both in the USSR and its constitutient nations: political systems can survive deep economic crises, and normally do, see North Korea or Iran or even the United States. Sometimes they become more dangerous, see Weimar Germany.

The next act: a domestic "terrorist" attack designed to increase "us vs. them" salience, followed by a quasi-military response. All to increase Putin's approval ratings.

Hopefully Putin won't unleash St. Mary's Virus. And Russians seem unlikely to ever embrace wide-scale adoption of Guy Fawkes masks.

Maybe if V had been wearing a beer helmet?

In "When money dies" Fergusson makes the interesting point that high inflation in Germany began earlier than most people think. The Germans financed the Great War by money printing and by 1918 the Mark had already fallen from 20 to the Pound Sterling to 200. That's one thousand percent inflation in four years.

In 1918 visitors to Berlin noted that whenever Germans got cash, they quickly spent it. Rich people bought real estate, gold, art and foreign currency, while poorer people bought clothes and hoarded consumer goods.

In effect, Germans were going short their own currency, whose value naturally continued to drop, leading to more selling and further declines that culminated in hyper-inflation in 1923.

Once consumers come to expect a continual decline in the currency *and* they pursue pro-cyclical selling of the currency, I don't think hyper-inflation can be avoided.

The Central Bank of Russia went to the same drastic measures to combat the weakening of the ruble, but whether they will bring benefits at least in the medium term? While the answer to this question remains open.

Short-term effect, of course, did not wait, but all efforts regulator rather quickly disappeared. The ruble began the day the rapid strengthening, but just an hour later again began to weaken.

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