You have to hand it to the Russians, there are few people out there who are better at bleak humor. Investors could be forgiven if they now believe that Russians have acquired the gift of prophecy as well.
The grim joke that was making the rounds in Moscow just the other week -- that oil, the ruble and Putin are all headed for 63 next year -- is becoming a no less grim reality even more quickly than that. (Well, except for Putin; he is still 62).
The falling knife that is the Russian ruble continues to fall. It has crossed 60 to the dollar for the first time on Monday, when it actually hit 63, and investors are scared. The Russian currency has lost more than 45% in value since the beginning of the year and 25% in the last three weeks.
The ruble has not been so weak since the crisis of 1998, when Russia defaulted on its debt, the Moscow Times wrote. What are the fears of investors and how justified are they?
The most acute, but the one with the most remote chance of actually happening, is the fear of default. There has been more and more speculation about the specter of 1998 coming back again. But this time it is different, at least for Russia's government debt. Lessons were learned from that crisis and Russia's government debt currently stands at less than 10% of gross domestic product, hardly the stuff of defaults.
But as is often the case, that is just half of the story. In the hunt for yield, investors have gobbled up debt issued by companies, especially in emerging markets, as it promised much higher returns than the zero-rate, septic environment created by money-printing central banks. This is where things get a bit complicated, because in Russia many of the issuers are quasi-state-owned companies.
Data from the Bank for International Settlements (BIS) shows that of all the debt securities outstanding for Russia in September 2014 ($252.5 billion), $217.8 billion were issued by corporations. Banks and other financial corporations have the lion's share, with $178.8 billion and the rest belong to non-financial companies.
The Economist puts the total figure for Russian companies' external debt much higher, at around $500 billion, of which more than $100 billion becomes due next year. Research published by various banks shows that quasi-state-owned firms like energy giants Gazprom and Rosneft or giant bank VTB are among the top borrowers in the country.
The ruble's collapse creates an enormous headache for Russian banks, whose revenues are mainly in rubles but debt is in foreign currency. Western sanctions compound the problem, as some banks are shut out of the international markets. The fall in the price of oil is hitting energy companies as well and it will make it more difficult for them to remain profitable while paying down debt. The Russian state will probably have to help some of these giants. But it, too, isn't looking all that good. The government needs a $100 a barrel to break even (that is, to have no budget deficit).
The central bank has tried to arrest the currency's fall, but to no avail. On Friday, it hiked its key interest rate to 10.5%, in line with markets' expectations but, with some analysts saying the monetary authority was behind the curve, the ruble kept falling. Inflation is running at almost 9.4% and analysts at Societe Generale have just hiked their estimate, expecting inflation to peak at 11.7% next year in February.
While it's unlikely that Russian companies will end up defaulting, investors are afraid that Russia will be pushed into taking measures to restrict the free flows of capital. The country liberalized its capital account in 2006, allowing foreign investors to buy Russian assets. One measure that has been floated has been the introduction of controls to limit outflows of private capital, which have reached almost $120 billion this year, according to Capital Economics' chief emerging markets economist Neil Shearing. A second measure that has been taken into consideration was forcing exporters to exchange part or all of their foreign exchange revenues in rubles.
There is going to be a lot of noise about capital controls going forward, as the Russian economy continues to grapple with lower oil revenues, Western sanctions and a falling currency. For a market-oriented economy, controls on the flows of capital would be a last resort. Shearing points out that controls "have a history of being porous" when it comes to preventing outflows, the legislation would be useless as local exporters, for instance, already exchange their revenues as they need rubles, and, finally, Russia would lose any remaining credibility in the eyes of the markets if it does introduce them.
"With lower oil prices having eroded the current account surplus, Russia will need to attract increasingly large inflows of foreign financing to fund investment and thus growth over the long run," Shearing said.