Week in review: All eyes were on the fall of the rouble this week, which was much volatile than what would have been expected given the decline in oil prices. The reason for this apparent overshoot probably lies with the economic sanctions on Russia from the west, which amplify the fears of recession in Russia beyond the effect of lower oil prices, in the minds of investors. Later in the week, the rouble lifted somewhat after the FX intervention from the Ministry of Finance. Overall, the rouble fell by 40% in the last three months. The Russian Government and the Central Bank have announced a series of measures in the last few days to stop the rouble debacle, including easing legal reserves for commercial banks, raising interest rates and fx intervention by the Ministry of Finance.
The big bazooka of central bank intervention has not been used yet and is unlikely to be used, as President Putin said in the latest press conference that reserves need to be protected for now. The official estimates of central bank reserves are US$ 416bn, but about half of those are in gold and in sovereign wealth funds, which means they are fairly illiquid. Other options, involve closing up the country through capital controls or limitation to imports.
As it is, Russia is on the brink of stagflation, with the fall in the rouble leading to higher imported inflation (possibly hyperinflation if the Central Bank starts printing money) and lower oil prices and sanctions hitting growth. A solution to ease these problems would be to engage with the west on the Ukraine issue, in order to have sanctions lifted, but this is unlikely to happen in a meaningful way soon.
In Europe, the ECB has announced it will start publishing minutes of its meetings, a summary of economic and financial data and of the discussion, but there will be no names attached to votes (note that many decisions are taken by consensus and aren’t formally voted). Hourly labour costs rose 1.3%yoy in Q3, compared with 1.4%yoy in Q2. The ECB is monitoring these data carefully as it looks for potential spillovers from the decline in oil prices on wage negotiations. The Swiss National Bank has set negative deposit rates to keep the Swiss franc stable against the euro at 1.2. The SNB has been fighting currency appreciation as a result of the trouble related to oil price and the tumble in the rouble.
Week ahead: Not many data releases in the week of Christmas
- Monday: December Flash consumer confidence indicator for the Euro area – likely to remain broadly stable
- Tuesday: Q3 Portuguese Quarterly National Accounts by institutional sector – further details, namely on private and Government’s savings and labor costs