THE AUTUMN FALL OF THE ROUBLE

"Times are changing, and the rouble is changing with them," this paraphrased Latin proverb characterizes the current situation with the Russian currency very well. However, the Western media is now circulating another version of the "Russian joke" - "oil, the rouble and Putin are all headed for 63".

By the way, Russian President Vladimir Putin reacted rather strongly to the fall of the rouble in his message to the Federal Assembly, demanding that the Bank of Russia and the government "discourage speculators from playing with rouble exchange rate fluctuations harshly and in a coordinated way".

In free floating

So, in the autumn of 2014, along with yellowed leaves of the trees, the Russian currency also began its "fall". While experts generally link the fluctuations of the rouble to the price of oil on the world market and sanctions against Russia, from which speculators are skilfully benefiting, there are more and more opinions that the devaluation that is being observed results from economic processes not of the last few months, but rather years.

The weakening of the rouble was accelerated by the reduction of foreign exchange intervention announced by the Bank of Russia on 5 November, which the market perceived as the free floating of the rouble. The Bank of Russia also abolished the corridor of the double currency basket and ended regular foreign exchange intervention. Thus, the regulator actually announced transition to a floating exchange rate of the rouble, warning that it is ready to enter the foreign exchange market in the event of threats to financial stability.

As a result, the rouble weakened compared with the beginning of the year by more than 60 per cent and reached 53-54 roubles per dollar and 67 roubles per euro.

The situation worsened in the first days of December, and the regulator was forced to sell 700m dollars on the market, justifying its step by the fact that the observed devaluation of the rouble creates preconditions for risks to financial stability and growth of inflationary expectations.

However, the situation continued to deteriorate, and according to analysts, stabilization should not be expected at least in the next couple of months. Emotions ran up to the point where the head of the Russian Foreign Intelligence Service, Mikhail Fradkov, publicly accused the US and its allies of attacking the Russian rouble and falling oil prices. According to him, American investment funds speculate with the rates through intermediaries. However, economists questioned Fradkov's conclusions, noting that in order to speculate with the rouble exchange rate in today's conditions, the States should hold billions of roubles in reserves.

Further predictions, as usual, are poles apart and depend on the mood of the expert. For example, optimists soothe the population by saying that the rouble will "recover" as soon as oil prices begin to rise, and this will happen, in their opinion, in spring. And pessimists predict catastrophic consequences for Russian small and medium-sized businesses, a serious deterioration in the social status of the population and a prolonged recession.

Without impact

It is clear that no matter how the situation evolves in our neighbours, it cannot but affect Azerbaijan at least because Russia is among the top five of our trading partners. In addition, the State Oil Fund of the country has assets in Russia and, therefore, the situation there may directly affect the profitability of their management. In 2012, as part of the new investment policy, the State Oil Fund purchased the 133m-dollar Gallery Actor retail and office centre on Pushkin Square in Moscow. In addition, the Fund owns a 2.95-per-cent stake in VTB, the second largest bank of Russia. The cost of this acquisition totalled 500m dollars. "Despite the fact that against the background of the events in recent years, the value of VTB Bank shares has seen significant changes, we would like to note that in accordance with the investment policy of the fund, such investments pursue not short-term speculative purposes, but long-term goals. Along with SOFAR, among the shareholders of VTB is the Norwegian Government Pension Fund (4.59 per cent), Qatar Investment Fund (2.95 per cent), American Blackrock Fund Advisors (1.24 per cent) and other significant structures," noted the fund. SOFAR also stressed that before investing in various financial instruments, the Fund conducts a serious analysis of all possible risks, including financial ones. "Investments in Russia, as well as in other countries, are under constant supervision and investigation," the fund concluded.

Also, as we have already noted, Russia ranks fourth on the list of foreign trading partners of Azerbaijan, although the share of rouble transactions in the total turnover is negligible. Moreover, among importing countries, Russia takes first place in the total imports of Azerbaijan with a share of 14.1 per cent. But even this fact can only talk about partial effects of fluctuations in the rouble exchange rate on the Azerbaijani economy. "Azerbaijan's economy is not dependent on the economies of other countries, including Russia," said a member of the parliamentary committee on economic policy, Ali Masimli.

According to him, the devaluation harms especially compatriots living and working in Russia, their incomes are falling, and therefore, the amount of money they send to their relatives and friends in Azerbaijan is also falling. But in general, it is a negligible effect on the economy of Azerbaijan as remittances account for only 2 per cent of GDP.

As for the citizens of Azerbaijan, they do not feel the fluctuations of the rouble, as the Russian currency is not popular among investors, and they traditionally prefer the national currency (manat), the US dollar and the euro. According to the executive director of the Azerbaijan Insurance Fund of Individual Deposits (ADIF), Azad Cavadov, the rouble is not present in the structure of the Fund reserves, 63 per cent of insured deposits are in manats, 33 per cent - in US dollars and 4 per cent - in euros.

The manat is stable

The situation with the Russian rouble also makes us think of one question - how strong is our manat and given the volatility of oil prices, can what happened to the rouble happen to it too?

The chairman of the Central Bank of Azerbaijan says that there is absolutely nothing to worry about, and today the rate of the manat is completely stable. "The manat is a very strong regional currency. It is accepted by different states - both in trade with CIS and other foreign countries. We believe that by the end of the year and subsequently, the stability of the national currency will be ensured," Rustamov said. According to him, over the last 4 years, the foreign exchange reserves at the disposal of the Central Bank of Azerbaijan have increased by more than 6 per cent, amounting to about 15bn dollars, which is much higher than the manat money supply in circulation. "Today, the Central Bank has the ability to convert the entire manat mass that is in circulation. This is one of the solid foundations of the stability of the Azerbaijani currency," Rustamov said.

He noted that due to the surplus in the balance of payments in 2014, the Central Bank was able to ensure the stability of the manat. "We have received a number of suggestions that we need to devalue our national currency, as this may create for us an advantage in relations with trading partners. But historically and scientifically it has been proven that devaluation creates only a short-term speculative advantage, and subsequently, as a result of the price rise, the state and its economy loses this advantage," the head of the CBA said, recalling that during devaluation, the population is the first to suffer because of high inflation, the falling cost of assets and deposits.

I must say that the stability of the Azerbaijani currency is recognized by Russian experts too. Thus, the chief economist for Russia and the CIS at the Renaissance Capital investment company, Oleg Kuzmin, said during his appearance on the RBC TV channel said that even if oil prices remain low over a year, it will not cause problems for the Azerbaijani manat as it is one of the strongest currencies in the world and is even more expensive than the dollar. "The reason for the phenomenon of the Azerbaijani currency and its stable strengthening against the dollar regardless of the many crisis factors, first of all, is the exchange rate policy, when the rate does not change, it is very strongly pegged to the dollar, and secondly, the country has a large supply of oil, and during the short period in the early 2000s when oil prices were very high, the country was able to accumulate large amounts of foreign exchange reserves. These reserves were spent in a limited way if necessary and continued to accumulate in good times," Kuzmin explained.

According to him, there is no need to talk about transition to a floating rate in Azerbaijan, and the probability of the devaluation of the manat is much smaller than in Kazakhstan, taking into account the reserves accumulated by the country. "At the same time, if oil prices continue to remain low, for example, over the long term, it is always possible in countries with a fixed exchange rate. But if we talk about Azerbaijan, this horizon is significantly farther for the country, and it is difficult to make predictions," Kuzmin added.