During the last two weeks, the media say about the central bank of Russia defending the ruble. Though the bank did spend $110 bn. forex reserves over this year, the statement is not entirely correct.
Officially, the central bank is moving to the free-floating ruble. Kinda surprising for a petrocurrency, but the bank’s recent actions should be seen from this perspective.
The other important point concerns political consequences of exchange rate changes. The Russian general government budget infamously depends on oil prices. Falling oil prices have two effects. First, it’s a net loss because fossil fuels get sold for less. Second, the Russian tax system ensures that the central (federal) government remains a relative winner. Oil and gas exporters pay taxes proportionally to their forex revenues and pay them in rubles to the central government. Changes in exchange rates compensate the loss of dollar revenue, so the federal budget escapes a huge deficit. The central government is even a bigger winner under the free float regime, when the ruble rapidly depreciates after sanctions and declining oil prices:
Given the float currency policy and central government interests, the strong ruble has no strong supporters in Russia. The central bank spent $110 bn. trying to avoid sharp moves in exchange rates. People and businesses massively get rid of rubles when they discover vertical hikes in rates, which are familiar after hyperdepreciation of the 1990s. Government tried to avoid the side effects of rapid changes in exchange rates: bank runs, inflation, and underinvestment.
The central bank sold about 20% of its forex reserves in a year. Meanwhile, the ruble did depreciate with all those undesirable effects. Was it a good idea to free the ruble when (a) state-owned corporations were seeking new sources of capital due to sanctions, (b) oil prices fell rapidly to decade-long lows, (c) uncertainty around Ukraine put pressure on the ruble, (d) import required time to respond to current balance hit by new oil prices? The market needed dollars to soften these shocks. Instead, the central bank quitted in the middle of the game with $500 bn. in forex reserves (25% of nominal GDP).
If not in crisis, what’s a better time for a central bank with a free-floating currency to spend reserves? An even worse crisis! It’s better to be wrong on this, of course, and instead, to assume that government just got the ruble down as smoothly as it could.
To have a currency crisis Russia suffered this week, a country needs two things: a local currency tied to a volatile international commodity and some external debt.
In oil exporting countries, the local currency is tied to your-know-what. As for the second condition, oil exporters are not supposed to borrow abroad when oil makes new highs. However, when the central bank let the local currency get stronger as export bucks flow in, borrowing abroad becomes attractive.
This opportunity is exposed when the PPP conversion factor to market exchange rate (PPP/EX) ratio is growing. And the ratio had been growing in oil exporting countries, though most of them escaped the temptation to borrow abroad:
(Russia and many others are missing in the World Bank’s data on debt. Among the remaining countries, red stands for energy producers. Negative changes in debt are due to countries (sometimes) repaying their external debts in 2001–2011. The worldwide average of external debt to GNI halved during this decade.)
And absolute values:
The debt is an important addition to yesterday’s currency overview. A currency may diverge from its “value,” but it’s external debt what creates risk. The Russian debt to GDP ratio stood still around 35% for years, but this level became a problem when the private sector had lost access to western credits. Kazakhstan isn’t under sanctions, but its 80% debt together with dependence on oil put the country in a similar position. Also, some other former Soviet republics, like Tajikistan, depend on dollar-denominated remittances from Russia—it’s their “oil” risks.
The Limits to Growth predicted the demise of economic growth back in 1972. Though the book received much criticism since then, Graham Turner recently confirmed that current development follows the patterns predicted by the book.
But there’s one problem, which is well-known to economists in growth economics. The resource ceiling ignores technology as the capacity to switch between limited resources. The confirmatory evidences Turner found belong to the upcoming trend. Indeed, the world economy consumes more oil and food. It’s okay. Bad things are supposed to happen when the economy per capita will be unable to consume more goods and services.
And the model hasn’t yet confirmed these bad expectations. It’s unlikely to. When some resource becomes scarcer, its price increases, and humans demand more efficient technologies, like energy-saving appliances and fuel-efficient cars. The world had an oil price shock already in the 1970s. It made better air conditioning and small cars popular even in the US.
The limit of growth comes not from too little oil, but from too much oil. Everyone invests in oil technologies for more than a century because no one sees a cheaper and more abundant resource. These investments made fossil fuels very efficient and attractive. Alternative energy can hardly compete with them.
Fossil fuels impose indirect costs, affect the environment, and crowd out investments into alternative energy. They are difficult to deal with. And their prices go down, thanks to fracking and other extraction methods.
Technologies may save the world from running out of oil, but they’re themselves powerful enough to slow down development. Nuclear weapon is making troubles around for more than 60 years. Hitler nearly obtained the atomic bomb. And Germany would get it not by surprise, like a terrorist organization, but because it was one of the most developed societies in the world before the 30s. Technologies aren’t safe in the hands of most advanced and democratic countries.
So, the limits to growth are trickier than the finiteness of certain resources. And these limits are less predictable.