Is the ruble worth anything? Why is there no panic in Russia over its 7% depreciation against the dollar in the past week?
In his press conference at the end of his two-day state visit to Kazakhstan, President Putin was asked about the sharp devaluation of the ruble against the dollar and euro that was occurring during the week. By my estimation the ruble exchange rate worsened by about 7% in just a few days’ time.
The question was no doubt anticipated by Putin, but nonetheless he did not give a definitive answer. Instead, he mentioned various determinants of the exchange rate at any given moment, including the latest price of the price of a barrel of oil on export markets (which has fallen below the critical $70 mark), the actual and anticipated rate of domestic inflation (now at 8% and presumed to be falling), and the seasonality of tax payments by industrialists.
Meanwhile, Western observers have been hoping that the exchange rate deterioration reflects some serious hidden weakness in the Russian economy and/or the effectiveness of the latest US financial sanctions which once again cut off Gazprombank, Russia’s leading bank for settlement of hydrocarbon exports from the international banking system, making it difficult to realize proceeds from sales abroad.
While the causes for the worsening exchange rate cannot be identified today with certainty, political observers in the West speculate on some hoped-for revolt of the oligarchs and broader population against the loss in value of the ruble, the main currency of their savings.
I say ‘main currency’ because Russian citizens at all levels of society enjoy the possibility of opening bank accounts in Chinese Yuan and other fairly stable currencies. They also can open accounts denominated in precious metals including gold, silver, platinum and palladium. And they can buy and receive in their hands bars of pure gold, the smallest ingots weighing as little as a quarter of an ounce.
Of course, for the general population in Russia there is not much experience with Yuan or with precious metals, just as there is not much experience with the stock market, whether in mutual funds, Exchange Traded Shares on the Moscow bourse or similar financial instruments which the Russian retail banks are now heavily promoting to their clients.
But what they can do is take advantage of the eye watering interest being paid by Russia’s leading banks on both time deposits and on special interest-bearing savings accounts that have no limitations on deposits or withdrawals and compound interest on the daily balances. The time deposits looked like a very good deal when they locked in 10% annual interest on 12 month accounts some six months ago. However, as of today, the special unrestricted savings accounts have flown past that level to the present-day 22% being offered. These rates rise and fall month by the month.
How can the banks offer these incredible interest rates on current accounts? Keep in mind that the prime lending rate of the Bank of Russia is now 21%. I assume that banks get a still better return on consumer credit that they extend to holders of their Mir cards or their automobile loans.
The stated reason for the Bank of Russia’s sky-high prime rate is to tame inflation and bring it down from 8% to half that number. Indeed, it is a tribute to the Central Bank that it has kept domestic inflation at ‘just’ 8% given the tight labor market in Russia which has already doubled the salaries of ordinary working people in the past 12 months. The labor market is tight because of the vastly increased production levels of the military industrial complex, which is now running on three daily shifts and which has revived manufacturing in the many one-factory towns in Central Russia that were moribund since the crash of the 1990s. Then we must consider as well the removal from the work force of many volunteers to serve in the Special Military Operation under contracts that begin with a 10,000 euro payment upon signing the contract.
There are many economically savvy commentators within Russia who decry the high prime rate for strangling the economy and putting in jeopardy the 4% growth in GDP that the Putin government has targeted. But the loss of affordable bank loans to industry and commerce under present conditions of the prime rate is at least partially offset by government subventions to the military industry and to favored sectors of the consumer economy.
In fact, I see the sense of the sky-high prime in that it has led to sky high interest rates being offered to the Russian public on their bank deposits. This surely has the effect of pulling cash out of the consumption column and putting it into the savings column, thereby reducing the inflationary pressures in the economy very substantially.
To be sure, the interest paid on bank deposits can only have an impact on the family budgets of those who have money left over at the end of each month to invest in savings accounts. That is a minority of the population, given that many Russian families live from month to month on their salaries.
The majority of the population may not profit from eye-watering interest payments on savings, but do profit from inflation being kept under control. These same people at the bottom of the financial ladder, especially pensioners and young families, receive many support payments that are regularly inflation-adjusted upwards. For none of these people does the exchange rate to the dollar or euro have any practical relevance. Whereas for those wealthier strata of the population who would be anxious about the loss in value of their rubles when they travel abroad or purchase big ticket items like imported cars, the interest on their bank accounts or the growth in value of their gold bars in safe deposit boxes should provide solace.
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I close today’s ‘diary entry’ with a remark on the much-discussed Russian attack on Dnepropetrovsk with its new hypersonic missile Oreshnik that has set tongues wagging in both Western mainstream and alternative media this past week.
One name has been missing in all accounts of the Russian ‘shock and awe’ action: that of the Russian political scientist Sergei Karaganov, who in July 2023 touched off a domestic and international controversy when he called upon Vladimir Putin to authorize a ‘demonstration’ attack on one or another West European country using tactical nuclear arms to bring the Collective West to its senses and put an end to the hubristic confidence that Russia was a paper tiger than can be pushed around.
At that time, some Russia-cheerleaders in the West believed that Karaganov had a good point, that Putin’s forbearance, his turning the other cheek after each escalatory move by the West was leading only to more dangerous conflict ahead, including full-blown nuclear war when Russia’s back was to the wall.
We now see that Vladimir Putin knew better what was in the Russian pipeline of weapons systems that could achieve the objective of ‘shock and awe’ without opening the Pandora’s box of nuclear weapons: it was precisely the high precision and vastly destructive Oreshkin, for which, as he has pointedly said, the West has no defense for years to come.
My conclusion is that there is some space between despair that Putin is encouraging escalation by holding back and despair that the Russians have also gone mad and are leading the way to Armageddon.
©Gilbert Doctorow, 2024