Wealthy Nations Daily Update - Russian Rouble

Comrades, today sees the one year anniversary of when the Russian rouble was set free from central bank control, the first time in its post-Soviet history.

Twelve months ago the Russian central bank decided to stop depleting their foreign reserves and allow the rouble to fall, and it did, down over 38% over the last twelve months against the US dollar. This fall almost mirrors the fall in the oil price; over the same period brent crude is down 42%. So what have been the consequences of this currency devaluation?

Inflation has been one of the main problems for the authorities as it moved from an annual rate of around 8.5% to peak early this year at just under 18%; a 13-year high. The bank countered this by repeated interest rate hikes peaking at 17%; however most of this emergency tightening has been reversed with the key rate trading around 11% today. But with inflation and high interest rates came the recession which Russia is still trying to cope with. The drop in wages and disposable income has been very dramatic with the World Bank warning that Russia will experience, for the first time since the 1998-1999 financial crisis, a significant increase in its poverty rate.

Since President Putin took control in 2000 the poverty rate has fallen constantly year-on-year from over 28% to the lows of below 12% but the World Bank expect a rise to around 16% over the next 12 months. Russia’s labour market historically adapts to hard times by cutting salaries and reducing working hours rather than laying off workers. In fact the unemployment rate has just returned to 5.2% where it was back a year ago after a small rise. So it would appear that the big cost has been to the Russian workforce and the standard of living.

However, Russia’s key oil producers have had a rather different experience, with the majority of costs in rouble, i.e. down 38%, income broadly in hard currencies, up 38%, and a very beneficial tax system they are announcing profit margins up around 5% on last year. This comes at a time when other energy companies are cutting back and worried about their budgets.

The fall in the rouble has therefore offset much of the fall in the price of oil, Russia’s main export, and allowed margins to be maintained if not increased even in the midst of the recession. The result is probably a windfall tax on oil and gas companies next year which will help the government invoke some energy into the still lagging domestic economy.

Our Russian holdings, which are all in US dollars, have been the best performing bonds as we look back over the year since the fall in the rouble, and still offer value according to our Relative Value Model with expected returns ranging from 10% to 30%, depending on maturity, should they move to fair value over the coming period.