Russia Update: ‘Ruble Hits Bottom, and Breaks Through’

December 16, 2014
Customers outside an exchange booth on Tverskaya Street in Moscow December 16, 2014. Photo by Artyom Sizov/

Welcome to our column, Russia Update, where we will be closely following day-to-day developments in Russia, including the Russian government’s foreign and domestic policies.

The previous issue is here, and see also our Russia This Week feature The Kremlin’s Policy-Making on Ukraine is ‘A Mess’; ‘Managed Spring’: How Moscow Parted Easily with the ‘Novorossiya’ Leaders and Putin ‘The Imperialist’ A Runner-Up For Time’s ‘Person of the Year’

The ruble continues to plummet despite the Bank of Russia’s raise of interest rates to 17%.

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Russia Holds ‘Massive Surprise Drill’ In Kaliningrad, Complete With Nukes

The ruble is in trouble, and long-time watchers of the Kremlin have predicted that Putin would work to change the narrative as quickly as he can. Could this be his first attempt to do so?

The Russian state-operated propaganda network RT reports that Russia has held surprise military drills in the Western Military District:

The Russian military has concluded a massive surprise drill in the Kaliningrad region to test the combat readiness of some 9,000 troops and 642 vehicles, including tactical Iskander-M ballistic missile systems rapidly deployed from the mainland…

Meanwhile, the Air Defense forces repelled a simulated attack of the maneuver enemy on strategic government and military installations. The tactical border protection exercises also included sea and underwater drills.

This video, aired on Russian state TV Channel 1, shows some of the footage from the drill:

James Miller
Estonia Expels Italian Politician and Journalist as Russian ‘Agent of Influence’

Giulietto Chiesa, a prominent leftist Italian politician and journalist long promoting pro-Kremlin positions, was arrested and deported from Estonia today, Euronews reported.

Police officers who came to his hotel did not have a warrant, but said the expulsion order was at the Foreign Ministry, ANSA reported.

While initial news reports said the reason for the detention of  was “unknown,” Estonian officials explained that it was because an existing “persona non grata” no-entry ban was disobeyed, Estonia’s public broadcaster  reported.

The expulsion sparked indignation by those who saw the expulsion as contradictory to Estonia’s self-identity as a modern liberal democracy:

In fact, there isn’t any international “right” to enter another country. The non-binding Helsinki Final Act of 1975 (the Helsinki Accords) promoted “the free flow of people and ideas” as a desirable goal to end the Cold War after post-World War II borders, including Soviet-annexed territory, was acknowledged by the West.

In the end, these borders changed peacefully because of the emergence of human rights and democracy movements in Eastern Europe, notably East Germany and the Baltic States, and the Soviet Union collapsed.

The EU accession process brought Estonia and other countries formerly in the Soviet orbit into the Western alliance, and Estonia was accepted into the Schengen Convention visa system, which enables any EU member of the Convention to travel to another member without a border inspection. Valid passports are still required.

Estonia believes it has to fight Russian espionage, however, if it is to hang on to its freedom.

According to the biography supplied by, Chiesa was in Tallinn to attend a conference titled “Is Russia an Enemy of Europe?” sponsored by Impressum, which Estonian officials claim is a Russian propaganda tool, thus implying Chiesa was an “agent of influence”:

Chiesa was a member of the Italian Communist Party, a MEP between 2004-2009 and was also stationed in Moscow for 20 years during the Soviet period as a Soviet Union-financed Italian journalist.

He had spoken at Impressum events in Estonia twice before, in 2008 and 2011, published a number of controversial books, including one which, among other topics, also focused on the relocation of the Bronze Soldier in Tallinn. He also supported Arnold Meri, an Estonian Soviet army veteran charged by Estonian authorities for genocide for his role in the deportation of Estonians to Siberia.

He has spoken critically of Georgia’s action in South Ossetia and Abkhazia and supported the Russian annexation of the Crimea.

Wouldn’t these positions still fall within the realm of freedom of speech?

Estonia is making the point that it will draw the line between advocacy and incitement when it reaches the point of a threat to public order and national security — restrictions that international and EU law recognize in principle — but about which people will disagree when it comes to definition of actual cases.

We could note that when Russia recently expelled four English-language teachers from Chuvashia, two American journalism professors, and later some students in a leadership exchange from St. Petersburg, there were no protests by the individuals and organizations now denouncing Estonia’s expulsion of Chiesa.

— Catherine A. Fitzpatrick

Sberbank’s Capitalization Falls Due to Rumors It’s Ceasing to Give Loans to Individuals

Sberbank’s shares fell by more than 15% on the Moscow Exchange on
Tuesday. This is believed to be the result of the rumors that the bank
would cease to give loans to private individuals starting December 16.

According to, Sberbank’s representatives are denying the rumors.
“We have no restrictions, [and] are working as normal,” says a
representative of the bank, asserting that the rumors have nothing to do
with reality. The bank reassures the media that it will continue to
give loans both to individuals and organisations despite the high
volatility of Russia’s financial markets and the Central Bank’s
emergency key rate hike.

The Central Bank of Russia increased the key
rate from 10.5% to 17% the previous night in an attempt to stabilize the
collapsing rouble.

Earlier today Sberbank was not processing its
clients’ bank cards for almost an hour. The bank explains that as a
“processing system error,” writes Kommersant.

another popular state-owned bank in Russia, was also rumored to have
ceased giving loans. Like Sberbank, VTB’s employees deny the rumor, but
admit that the “significant” increase of the Central Bank’s key rate
“has created a need to re-evaluate [the bank’s] terms of service with
its clients,” which may mean that VTB will increase interest rates on
already outstanding loans as well as new ones.

Meanwhile, some
smaller banks, such as Svyaznoy bank, have stopped processing credit
cards until they can reassess the interest rates on those cards to “ensure profitability.”

Anton Melnikov

In Current Economic Collapse Role Of Sanctions Overstated, Role Of Putin’s Policies Too Often Ignored

In our latest analysis we assess the root cause of Russia’s economic collapse. While some Western commenters say that Western sanctions are the core reason for the ruble’s collapse, and while some others suggest that this is all related to the price of oil, The Interpreter‘s managing editor James Miller takes a closer look at the timeline of the ruble’s collapse to find hidden factors driving the currency down. What he finds is that sanctions may not have had a large impact, but Putin’s policies in many key areas ensured that Russia was not ready for lower energy prices, they actually triggered investor panic which led to the collapse, and they continue to impede the ruble’s recovery.

The reality, however, is that because of these factors there just may not be much the Russian government can do to fix the ruble at this point. But the last time Putin was cornered he annexed Crimea and invaded the Donbass. What will he do now if he believes he has no good options?

How Does Russia’s Current Economic Crisis Stack Up With Others?
Ben Judah posts this graphic from Reuters comparing Russia’s current economic crisis to other recent economic catastrophes: 

But Russia’s problems are far from over. The ruble is slowly recovering some today, but yesterday’s trading started with the ruble at 58.12 per dollar, and even with all the efforts of the Russian Central Bank, the ruble is currently valued at 67.55 per dollar, down from its peak at 77.46 but still very weak:

James Miller

Estonia Charges Former Intelligence Officer with Treason as Double Agent
Estonia’s state security service known by its initials as the CAPO charged Uno Puusepp, a retired Estonian CAPO officer who moved to Moscow three years ago, with treason.

Puusepp recently appeared in a TV document created by NTV, which is close to Russia’s intelligence:

According to Newsweek’s Europe correspondent
Elisabeth Braw, who recently wrote a story on the return of Cold War
, the Puusepp case will not be the last instance of Russian spy
activity in Estonia:

“Puusepp’s long career as a Russian double agent shows that
the Estonian authorities weren’t exaggerating when in the 1990s, even
until the Ukraine conflict, they were among very few people to warn of a
Russian threat.”

Estonia, a small Baltic nation with a population of 1.32 million
bordering Russia, takes the battle against Russian espionage very

In October, Estonia arrested two former KGB agents
who crossed the border, Mihhail Suhoshin, 64, and Alexander Ladur, 54,
who are being held on charges of resisting arrest and illegally entering

These arrests followed an incident where an Estonian counter-intelligence officer Eston Kohver was detained on Estonian territory and dragged across the border into Russia,
where he remains on charges of espionage. The abduction occurred two
days after President Barack Obama visited Estonia on the eve of a NATO
summit to make guarantees of security.

— Catherine A. Fitzpatrick

Will Russia Introduce Foreign Currency Controls?

Analysts are seriously talking about the possibility of introducing foreign currency restrictions in Russia to halt the further collapse of the ruble, says Vedomosti, an independent business newspaper.

“Our traders are informing me that we see no bids to buy rubles,” says a Swedish banker to Bloomberg View, after the ruble lost more than 10 percent of its value against the dollar yesterday.

At Bloomberg View, Leonid Bershidsky also points out
that the ruble’s weakness yesterday wasn’t related to oil prices, and
traces it to Rosneft’s big bond issue which the Central Bank agreed to fund.

Joseph Cotterill compares this rate hike
to those in the 1998 crisis: “The CBR hiked from 30 per cent to 150 per
cent between May 19 and May 27 that year,” so we’re not there yet.”

According to the Financial Times:

“It cannot get much worse for Russia.
The final step for the perfect storm would be the introduction of
capital controls,” said Heinz Rüttimann, emerging market strategist at
Julius Baer. 

The Financial Times (FT) also reported that as a “sign of the pressure policy makers are under,” Sergey Shvetsov, deputy
governor of the central bank, said of the collapse : “I couldn’t
imagine even a year ago that such a thing would happen — even in my
wildest dreams. The situation is critical.”

FT also reported that the ruble’s trouble is spreading to international markets:

The market chaos initially hit the three European banks that are most exposed to Russia — France’s Société Générale, Italy’s UniCredit and Austria’s Raiffeisen Bank International
— hard, wiping as much as €3bn off their combined market value.
Unicredit made up all its losses in late afternoon trading but SocGen
was still trading 2.5 per cent lower, while Raffeisen was down more than
8 per cent.

But it was not only financial services that were affected. Carlsberg, the Danish brewer with a big share of Russia’s beer market, fell almost 7 per cent. Metro, the German retailer with outlets in Russia, fell 2.4 per cent

Leonid Bershidsky said the example of Malaysia’s example of capital controls is being discussed in Russia:

His anti-Western advisers are evidently holding up the Malaysian
example. “What can [Central Bank Governor Elvira] Nabiullina do within
the market model if she is forbidden to sell too much foreign currency
and some of the world’s biggest financial players have been ordered to
play against her?” Sergei Markov, a pro-Putin academic, wrote in a column on “Since the reasons for the ruble’s fall are political, the
response should be political, too. For example, a law that would ban
Russian companies from repaying debts to Western counterparties if the
ruble has dropped more than 50 percent in the last year. That will
immediately lower the pressure on the ruble, many countries have done
this, Malaysia is one example. It’s in great economic shape now.”

Vedomosti quoted Andrei Movchan, co-chairman of the board of directors of the investment company Trety Rim (Third Rome) at a business breakfast organized by the news site this morning:

“I wouldn’t throw out from consideration either a freeze — I think that exactly a freeze, as we don’t like the word ‘default’ — a freeze for some time of external obligations or a ban on foreign currency savings inside the country, which, by the way, would not be a bad move for stabilizing current.

Alfa Bank’s chief economist Nataliya Orlova said clients were constantly asking whether restrictions on foreign currency operations would be placed.

— Catherine A. Fitzpatrick

Russian Opposition Leaders Blame Rosneft’s Sechin for Ruble Fall; Sechin Blames Opposition

Since the ruble began to fall dramatically in recent weeks, the Russian opposition has repeatedly blamed Igor Sechin, head of Rosneft, a close associate of President Vladimir Putin, for the crisis.

The anti-corruption blogger Alexey Navalny, along with other opposition leaders, have claimed Rosneft is buying up dollars with rubles loaned from the state, not directly, but through their affiliate companies. Boris Nemtsov said yesterday as we reported that the Central Bank had “turned on the printing press.”

“Sechin’s Rosneft received 626 billion rubles [at that time US $10.3 billion] and went with it to the foreign currency market.”

And former Aleksei Alekshenko,  a leading Russian economist, former deputy governor of the Central Bank, and former deputy finance minister under Yeltsin explained in a blog post yesterday on the independent site (translation by The Interpreter):

The ruble lost 10% in a day, and I’m not sure it will end there today —
it is possible it will fly further. I think this is the action of two
factors. First, this is a reaction to the Rosneft bonds — or rather the
money which was given Rosneft came on to the currency market.

am not saying that Rosneft bought currency, but we should not be taken
for idiots: I have no doubt that Rosneft put money in its “daughters”
[affiliate companies]; the “daughters” placed money in banks, and the
banks placed money in [foreign] currency. Because if there is a chance
to earn 5-10% a day, you’d have to be a total idiot not to make use of

Aside from Rosneft, there is yet another factor — panic
mixed with lack of trust in the Central bank, the government and the
president. When the head of the Central Bank says “we will not raise
interest rates, we have to fight the devaluation of the ruble,” and hte
prime minister advises “you should relax and enjoy yourself” — well,
people relaxed and enjoyed themselves. So either the government takes
people for idiots or people believe the government officials are idiots,
but one of them is an idiot.

Sechin made a statement today denying that he was responsible for the ruble fall, saying in fact he was helping to stabilize the currency system, Interfax reported.

As always, you have to note who is spreading these rumors. There is a method in ministries of distracting attention on a disliked object, in this case, which is enabling us to reach the main goal, which is placing interested parties before itself. In this case, the disliked object is the company Rosneft.

We have to investigate the interested parties and provocateurs. Who are these people, these Navalnys, Nemtsovs, and Kudrins, what purposes are they achieving.

In addition to Navalny and Nemtsov, Sechin referenced Aleksey Kudrin, former Minister of Finance from 2000-2011, who has continued to criticize the Kremlin’s decisions.

Sechin’s statement prompted some joking by parody accounts:

Translation: @PutinsEconomy I ask you to blame A.A. Navalny for my death. Date, signature.

But questions remain about Rosneft’s bonds:

Interfax reports (translation by The Interpreter):

Rosneft placed a record number of bonds on the Russian
market last week, totalling 625 million rubles ($9.5 billion). Sechin
denied his company had swapped these rubles for dollars. He said that
all plans to attract ruble loans do not involve converting these rubles
into cash, and bank agreements do not contain such clauses. He said
Rosneft had earned $118 billion in the first 9 months of the year, of
which $75 billion was sold on the Russian market (up from $60 billion
last year). He also said Rosneft would pay 3 trillion rubles in taxes
($41.1 billion) and that would “undoubtedly be an element of
stabilization for the currency market, the money market as well.”

Yevgeny Yasin, former Minister of Economics and currently
research director for the Higher School of Economics, says the problems are more systemic. He thinks the
Central Bank is moving in the right direction, but is chronically late
and insufficiently bold, says He believes it may still raise interest rates to calm the market, but that it will be insufficient:

There are deeper institutional problems in the economy.
There is no rule of law, there is no protection or property rights and
so on. Business is experiencing distrust in the government and is
leaving the country. Society, the middle class also don’t believe the
powers-that-be, they feel they are in danger. The Central Bank is not
capable of solving these problems.

— Catherine A. Fitzpatrick

Ruble Continues to Plummet Despite Emergency Interest Rate Hike

The ruble is currently at 72.90 to the dollar according to Bloomberg — but refresh the page as this will likely change soon; it has gone as low as 80 in value against the dollar today according to Vedomosti and 114 against the euro.

The red highlights what happened right after the Central Bank raised interest rates by 6.5% last night. The resulting gain in the ruble’s value has already been erased.

The Central Bank has not made interventions on the market, according to a private trader who spoke to Vedomosti.

“Raising the interest rate to 17% is the end of the banking system,” the top manager of a medium-sized bank told Vedomosti emotionally.

Opening a meeting on Far East development this morning, Prime Minister Dmitry Medvedev said “We and our colleagues will meet and talk today about financial issues.”

Some websites that give information about the rate of the ruble against foreign currencies have been overwhelmed or are down, including Sberbank and ZenRus.

Translation: The ruble has hit bottom, broken through, and opened the portal to hell.

The Eurasian Customs Union is not helping Russia now:

Translation: Video. Traffic lines at the border of Russia and Kazakhstan: while the ruble is falling, many are hurrying to buy up goods.

— Catherine A. Fitzpatrick