from Follow the Money

Russian ruble, safe haven in times of trouble?

August 11, 2007

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Russia let the ruble appreciate against its euro/ dollar basket this week.   Not by all that much.   But this was also a week many emerging market currencies fell against the dollar, as part of a general retreat from risk.  

There likely were modest capital outflows from Russia last week as well, as foreign investors sold their Russian stocks and then convert their rubles into dollars (The RTS is off its late July peak).  There certainly were small capital outflows in the first week of August.  However, Russia could easily meet the increased demand for dollars out of its reserves (Reserves fell in the first half week of August).  Russia now has way more reserves than it needs.

No wonder Credit Suisse calls the ruble a safe haven:

According to Credit Suisse, Russia’s ruble and Brazilian real are the safest assets to wait through forthcoming problems. 

The New York Times also took note, earlier this week, of the fact that the Russian ruble is now a currency that a lot of folks -- Russians and foreigners alike -- want to hold.  

Andrew Kramer of the Times wrote: 

Russian banks offer accounts in rubles, dollars or euros. Of the three, ruble accounts are attracting the most funds. Ruble-denominated personal savings accounts rose 6.8 percent in the first quarter of 2007, while foreign currency accounts were level, according to a report by Goldman Sachs.  ...

Last summer, authorities eliminated all restrictions on ruble trading, making the currency fully convertible and easing the way for the capital inflow ....  In the first six months of this year, net private capital inflow into Russia was $67.1 billion — more than during the entire first decade after the collapse of the Soviet Union. In the same period last year, capital inflow was $14.5 billion.

Strong demand for assets denominated in emerging market currencies from local and foreign investors alike calls into question the relevance of models that postulate that emerging markets are unable to create the financial assets demanded by the growing economies.  At least right now, that doesn't seem to be the case.   Central bank reserve accumulation doesn't reflect repressed private demand thwarted by capital controls; indeed, it often reflects the growing desire of the citizens of the emerging world to hold fewer dollars and euros and more assets denominated in their own currency.

After all, oil is still above $70 -- far higher than the roughly $45-50 a barrel price Russia needs to cover its (rapidly growing) import bill.  The Times' ramer is entirely right to note that the ruble would be much stronger but for the ongoing intervention of the Bank of Russia.  

Even more important, as measured by purchasing power parity, a gauge of a currency’s value based on the goods it can buy, a dollar should buy roughly 15 rubles today, according to a report Merrill Lynch issued in July. By that measure, the ruble remains the world’s second-most undervalued major currency, behind only the Chinese yuan, whose value has given policy makers in Washington headaches.

Indeed, the ruble would be even more valuable today if not for the Russian central bank intervening to keep it from rising more.

So would China's currency, despite the Economist magazine's ongoing arguments to the contrary. 

But if oil stays around $70, I would bet that some GCC currencies are even more undervalued than either the RMB or the ruble.  The Gulf countries collectively have far fewer people and far more oil than the Russia – but currently have far weak currencies.   That is a puzzle worth explaining.  I consequently am eagerly awaiting an article on the weak Saudi riyal, UAE dirham, Qatari dinar and Kuwait dinar.  

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