RUSSIAN CAPITAL FLIGHT

BLOOMBERG - Jul 5, 2023 - The ruble has crashed through what a top government official recently called Russia’s “comfort” zone after a mutiny that briefly threatened President Vladimir Putin’s power compounded months of capital outflows.

Russia’s currency weakened on Wednesday to trade close to 91 per dollar after depreciating almost 2% to levels last seen a month after the invasion of Ukraine in February 2022.

It’s among the worst performers in emerging markets this year with a loss of about 18%. Last month, First Deputy Prime Minister Andrey Belousov described a range of 80-90 per dollar as “optimal” for the Russian economy.

The ruble’s descent is a stark reminder of the challenges facing Russia as it adapts to sweeping international sanctions at a time when political risks are on the rise and the government’s coffers are under stress from a decline in energy earnings.

And just as a recovery in imports drives up demand for hard currency at home, Russian households and businesses are seeking out safety by shifting money outside the country. The stock of retail deposits held abroad increased by $43.5 billion from early 2022 until May 2023, according to Bloomberg Economics.

The failed mutiny by Wagner mercenaries provided the latest spark for the ruble’s weakness. Though the uprising late last month ended quickly under a deal brokered by Belarus President Alexander Lukashenko, the episode represented the greatest threat to Putin’s almost quarter-century rule and raised questions about stability in Russia as the war against Ukraine approaches its 17th month.

“Perhaps this became a trigger for the weakening of the ruble, in combination with growing imports, weak exports, demand for foreign currency for payments to non-residents and an extremely low level of liquidity,” said Natalia Lavrova, chief economist at BCS Financial Group.

The ruble has grown more vulnerable after a deterioration in Russia’s external finances. Unlike last year, when the government earned a record windfall after a rally in commodity prices, export proceeds have fallen sharply in 2023.

International restrictions on Russia’s oil, including price caps imposed by the Group of Seven nations, are taking their toll amid an almost complete halt of its pipeline gas to Europe, once Moscow’s biggest customer.

While Russia’s budget will benefit from a weaker domestic currency by boosting the government’s revenue, the depreciation could stoke inflation and raises the possibility that the central bank may soon move to raise interest rates again.

The political crisis “certainly increased the attractiveness of the dollar, causing an additional outflow of funds into foreign currency, foreign banks — both by households and companies,” Lavrova said.

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