Russian rouble banknotes.
(photo credit: REUTERS)
The Russian ruble’s spectacular decline on Tuesday stirred memories of a wider currency crisis in 1998 that spread to other emerging markets and hit Israel.
The ruble lost 11 percent against the dollar on Tuesday, its steepest one-day fall since the Russian financial crisis in 1998. It has fallen 20% since the start of the week and more than 50% this year, though it rebounded somewhat on Wednesday.
A major contributor to the drop has been a steady decline in the price of oil, which usually accounts for half of the government’s budget and a quarter of the overall economy.
But unlike the previous currency crisis, it is not clear that the ruble’s fall will significantly hurt Israel and its economy.
“Even if the Russian economy were to take a big hit, that in and of itself would not be particularly dramatic to the Israeli economy,” former Bank of Israel chief economist Asher Blass said on Wednesday.
Israel doesn’t have particularly strong trade ties with Russia, which has failed to diversify its petroleum-based economy, though Agriculture Minister Yair Shamir saw the EU’s recent imposition of sanctions as an export opportunity.
“They’re extremely dependent on the West, much more than the West is dependent on them,” said Blass, who is the CEO of consultancy organization ERCG and a professor at Ashkelon Academic College. With the clear exception of energy, “in most fields, Russia exports to Europe less than Israel does.”
One group in Israel that may be hurt consists of Russian immigrants who receive pension payments from Russia, though it is not clear how many people would be affected.
The 1998 Russian financial crisis, in which the currency collapsed within days, took place after the onset of the Asian financial crisis, in which currency and debt panic spread from one market to the other. That more global situation hit the shekel.
Blass noted, however, that the implications of such dramatic events could not be determined within a day.
Their consequences may take weeks or months to play out, he said.
Russia may be better equipped to handle the current crisis, according to Guy Beitor, Psagot Investment House’s manager of global markets.
“It’s important to note that there are two substantial differences between the conditions of most emerging economies today and their conditions then,” he said on Tuesday.
Russia has higher foreign exchange reserves to battle sharp fluctuations, and it denominates its debt in local currency, meaning that exchange rate shifts won’t push it into bankruptcy, Beitor said.
“This doesn’t mean, of course, that if the price of oil doesn’t stay low, Russia won’t go bankrupt. It just means it will take longer than before,” he added.
Russia’s central bank has conducted more than $80 billion in foreign exchange market interventions this year to defend the ruble.
In a state-of-the-nation address on December 4, Russian President Vladimir Putin failed to offer any big ideas to turn around the economy, which is sliding toward recession amid a combination of Western sanctions over the Ukraine crisis and the fall in the global price of oil.
“These sanctions could be lifted in a matter of weeks or days, depending on the choices that President Putin takes,” US Secretary of State John Kerry told reporters in London on Tuesday.
For the Russian economy, the currency crisis means a deeper recession is more likely next year, as high interest rates will crimp growth. For businesses, it means more uncertainty and less access to funding. For the central bank, it means a credibility crisis.
For Putin, it increases the risk of losing two of the main pillars on which his support is based – financial stability and prosperity – and brings an unwelcome policy headache at a time when relations with the West are in crisis over Ukraine.
Yet Eyal Horowitz, chairman of accounting and consulting firm Baker Tilly, doesn’t see Russia succumbing.
He argued that the Russian economy is “strong” and predicted that in the medium and long term, its economy will rise again.