In December, the Russian rouble plummeted to a record-low level. Since then, it has somewhat rebounded, but all in all, the rouble depreciated sharply in 2014 (by more than 40%). The sharp depreciation is explained by a combination of factors being the western sanctions, the sharp drop in oil prices and existing structural weaknesses in the Russian economy such as the high reliance on energy, a shrinking labour force, a deterrent investment climate that constrains investments, and lack of investor confidence that has accelerated capital flight.

Impact on country risk

The sharp rouble depreciation has of course an important impact on the Russian economy and on the creditworthiness of the companies indebted in foreign currency that do not dispose of foreign currency earnings (or hedges). The Russian authorities already announced financial support for the Yamal LNG project and key banks. The economy is expected to be in recession in 2015. The main uncertainty concerns the magnitude of the recession. Indeed, the answer largely depends on geopolitical development and oil prices. A sharp recession could lead to increased social unrest. Beyond Russia, the sharp rouble depreciation has ripple effects on the region and notably on Belarus and Kazakhstan, both members of the Eurasian Economic Union. The Belarusian authorities already devalued their currency by around 7% (from 11,900 rouble per US dollar to 12,740), increased capital controls (a 10% tax on buying foreign currency and they increased the share of mandatory FX proceeds from 30% to 50%) and more than doubled its interest rates. Moreover, the president sacked some ministers (including the Prime Minister) and the central bank’s governor at the end of December. Kazakhstan is likely to announce measures as the country also suffers from low oil prices (oil makes for up to 60% of its current account receipts). In February 2014, the country already devalued the tenge by almost 20%  to keep its currency in line with the Russian rouble and to boost its competitiveness. This measure was highly unpopular. The other CIS countries are also likely to suffer from spill-over effects from the Russian economic crisis. In particular, Tajikistan, Kyrgyzstan, Moldova and Armenia are likely to be hit hard by the Russian economic slowdown given their strong real linkages with Russia (via exports and remittances) which accounted for 49%, 36%, 29%, 25% and 20% of their own GDP respectively. The table below provides details of real linkage with Russia (via exports and remittances) for countries that have real linkage accounting for more than 10% of their GDP. The Moldovan leu and Armenian dram already depreciated as the foreign exchange reserves of both countries are under severe pressure. In November 2014, they declined by 16% for Moldova and by 27% for Armenia compared to their January 2014 level. Kyrgyzstan, where foreign exchange reserves declined by nearly 5% between January 2014 and September 2014, closed down private exchange offices.
Turkmenistan, a country that is highly reliant on hydrocarbon revenues, also took measures by devaluing its currency, the manat, by around 19% (from 2.84 manat per US dollar to 3.5). Other restrictions and currency devaluation/depreciation are likely to be adopted given the gloomy outlook for the Russian economy and hence for the region.

Source: IMF article IV consultation with Russia (July 2014)

Anlayst: Pascaline della Faille, p.dellafaille@credendogroup.com