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President Vladimir Putin

Even by the standards of this year’s market turbulence, the rouble rollercoaster ride has been dramatic. It lost about 20 per cent of its value in a month, at some points approaching the important psychological threshold of 100 roubles per US dollar. The currency has staged a recovery in recent days yet is still more than 2.5 times as weak against the dollar than it was two years ago. The depreciation could have been worse, however, and for that some credit is due to the Bank of Russia.

The rouble exchange rate is determined by three factors: the oil price, capital outflows and the central bank’s reserve management. In the past year, the oil price dropped dramatically. The other two factors, though, performed better than expected.

A year ago, the official forecast for net capital outflow in 2015 was $115bn. The actual number turned out to be much smaller at $57bn. Given western sanctions against Russia in the wake of the Ukraine crisis, foreign investment into the country has dried up.

On the other hand, in 2015 Russian companies and banks were scheduled to repay about $110bn dollars of external debt. It was unclear how much of this was owed to foreign creditors and how much to their Russian owners’ offshore companies. In 2015, the Bank of Russia clarified this, surveying the largest business groups. It also improved communication with the market — in contrast to the previous year when non-transparent handling of certain transactions — such as the $11bn Rosneft bond sale in December 2014 — resulted in a run on the rouble.

In 2015, the bank also confirmed its commitment to the floating exchange rate and kept its reserves constant at about $370bn. Again, this was very different from 2014 when the reserves declined by a quarter from $510bn. While spending the reserves props up the rouble in the short run, it can only delay depreciation. A transparent and credible commitment to the floating exchange rate policy creates confidence in the long term.

Does this mean the rouble will not depreciate further in 2016? Unfortunately, no. If oil prices stay at the current level and there are no changes in capital flows (because of shifts in foreign policy, say), the rouble is almost certain to lose another 10 or 15 per cent of its value.

As the government cannot borrow (because of sanctions), it will have to make another big fiscal adjustment in 2016

While the Bank of Russia has proved it can manage the reserves (and therefore the real exchange rate of the rouble), it has not done the same with inflation — and therefore the nominal exchange rate. In the past two years the bank announced inflation targets of 5-6 per cent per year but the actual rate hit double digits. While the official forecast for 2016 is 6 per cent, inflation expectations are about 15 per cent. Apparently, the central bank cannot withstand pressure from Russia’s corporate sector demanding lower interest rates: the current central bank interest rate is already 2 percentage points below the inflation rate.

The government also benefits from higher inflation. The current budget projects a deficit of 3 per cent of gross domestic product but this is based on an oil price of $50 a barrel. At $30 a barrel the deficit is likely to be 6-7 per cent. Explicit reductions in spending are hard, given that the current budget is already a result of significant tightening.

As the government cannot borrow (because of sanctions), it will have to make another big fiscal adjustment in 2016. Russians joke that government will use its reserve fund to buy US Powerball lottery tickets but the approach is likely to be: make cuts, raise taxes and use inflation to take care of the rest. As usual, the cost of higher inflation will be borne by the poor.

This fiscal drama, as well as rouble volatility, reveals the central unresolved challenge of Russian economic policy. Although economic diversification has been the government’s main goal since 2000, exports and budget are still driven by oil prices. This challenge cannot be addressed by central bank policies: it requires structural reforms, protection of property rights and rule of law. The fact that this message has been stated many times, including by the Russian government itself, does not make it any less valid.

The writer is a professor of economics at Sciences Po, Paris