Why A Weak Ruble Weighs On The Entire Russian Economy

Analysis: The depreciation of the Russian ruble hurts the whole country, especially the poorer masses who don't deal in dollars. And no, you can't just blame it on foreigners.

Russia still has an uphill climb to broad prosperity (Marc Veraart)
Russia still has an uphill climb to broad prosperity (Marc Veraart)
Elena Kotova*

MOSCOW - We are being told not to storm the currency exchange bureaus, where people are already starting to fight over dollars. Meanwhile, experts are recommending that people divide their savings between rubles, dollars and gold.

That is all good advice, especially since most Russians don't have millions of dollars of savings, but maybe a few thousand. Salaries are paid in rubles, and that is what most of us use to pay for food, clothing and rent. For Russians, the standard of living depends primarily on the stability of jobs, salaries and prices, not on the growth of nest eggs.

But regardless, a weak ruble is a threat to all of those things, especially if you look not only at the past month, when the Russian currency dropped by 11 percent compared to the dollar, but also at the whole past year. The value dropped from 27.5 to 33.5 rubles per dollar over the course of last year, a 21 percent drop. That enormous plunge is a hidden devaluation. Slowly but surely products like Dutch butter, Australian beef, writing paper, pencils and mobile phones are getting more expensive.

Let's say that the government will keep rent prices down for low-cost shared housing, known as "communal" apartments. Faucets, light bulbs and pipes are made domestically, but the trucks that transport those supplies are certainly imported. And if the expenses for communal apartments go up, then either you have to subsidize the housing with the government budget (which means making cuts elsewhere) or you have to stop doing all renovations, and maybe cut off hot water.

But even that isn't the most important effect. It's impossible to predict what the drop in the ruble's value will mean for the broader Russian economy, just as it's impossible to understand the reasons for the devaluation.

Quietly, the crisis has returned

The Central Bank has spent $10 billion buying rubles over the past month in an effort to prop up the currency. At the same time as reserves are being depleted, there is an economic crisis looking through the window at us. We have decided to believe that the economic crisis ended in 2009, but in reality it just shifted. The crisis started to tiptoe back last fall, and is now advancing with brisk steps.

If the ruble's exchange rate continues to creep downward, then it seems that our exports, which are primarily raw materials, will be worth more rubles. But with both the net amount of Russian exports and their value in dollars dropping, even exporters are cutting costs. And what can we say about importers? The increases in their expenditures is related to the ruble's exchange rate, coupled with the decreases in demand. And if you are cutting costs, that means you are also cutting jobs. The government, of course, will punish companies that lay off workers, but it is only possible to keep the jobs if salaries are lowered.

As with a lot of other thing, the ruble's fall is being blamed on "outside factors." In Europe, it's the euro crisis, in China and the US, it's the slowed economic growth. "There is evil all over that is making life harder for Russians..." That half-truth, like most half-truths, is actually mostly a lie. Yes, there is a worldwide crisis. But unlike many countries, Russia has a particularly small range to maneuver when it come to softening the blow for its citizens.

We don't have any source of government revenues that comes close to matching the revenues from raw materials, which is often what is hit hardest by crisis. We don't have any way to support the ruble other than selling our monetary reserves. That means we should freeze salaries for government employees, freeze military purchases, as well as pensions. We're going to cut where it hurts, not by playing around with the trade balances, export supports and corporate restructuring, so that it affects people as little as possible.

For the past 20 years, we have been paying for promises of modernization, and diversification. We have been paying for the restricting of businesses that are not profitable, and retraining for people who should have been fired long ago. We have been paying in rubles.

*Elena Kotova is an economist and a writer.

Read the original article in Russian.

Photo - Marc Veraart

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