If the 2014 Rouble crisis were a blueprint for the Lira …

There are a few striking parallels between the crisis in the Russian currency witnessed at the end of 2014, and the turbulences in the Lira prevailing at present. They start with the exchange-rate trend to date. Compared to the beginning of the year, the Lira had lost up to around 45% against the US Dollar, while in the case of the Rouble, calculated for the period in question the decline was only 3 percentage points higher. Moreover, following the rapid devaluation in the Russian currency over the course of about three weeks, a temporary moderate recovery likewise set in, only to then give way to another pronounced drop.

There are also similarities between the two currency crises as regards the causes. The basis for the Rouble devaluation was laid in 2014 by the clear decrease in the price of crude oil. However, the actual escalation in capital fleeing the country was the result of a mix of different factors that are certainly comparable with those in Turkey: diplomatic differences with the “West”, sanctions imposed by the EU and the USA, an economic outlook that was growing dimmer, structural economic policy failures and high foreign debt. The situation was aggravated by the fact that there were doubts as to the independence of the central bank, which in December 2014 initially took to the stage with restraint and only raised the key lending rate by 100 Bp to 10.5%.

Should the Lira follow the Rouble’s example, the exchange rate may be in danger of falling further

Only a few days after its regular December meeting in 2014 the Russian central bank then abandoned its restraint and raised the key lending rate to 17% – about 7 percentage points above the annual inflation rate prevailing at that time. In this way, the central bank succeeded in counteracting the panic wildfire on the foreign exchange market. In the days that followed, the Rouble gained no less than 30% on the US Dollar. The RUB recovery makes it clear that a country’s central bank plays a significant role in a currency crisis, be it positive or negative.

The Rouble crisis at the end of 2014 provides a key insight that no doubt also applies to Turkey: The central bank cannot shoulder things on its own! Nabiullina & Co. managed to calm the foreign exchange markets and end the panic-driven Rouble selling, such that the intraday trading rates that hit an all-time low on 16 December (the USD-RUB rate rose temporarily to almost RUB 80) were not reached again at any point in the course of 2015. The ongoing diplomatic differences, the sanctions, and the collapse in the price of oil continued, however, to put pressure on the Rouble. In early 2016 the Russian currency once again fell to new all-time lows.

Another insight from the Rouble crisis is of relevance as regards gauging the longer-term prospects for the Lira. The Russian central bank has in recent years managed to bolster confidence, the inflation rate is now at a comparatively low level, economic growth of just short of 2% (YoY) is at least sound, and the price of oil has tangibly recovered. However, in the past few years the USD-RUB currency pair has always remained far from the rate of around RUB 35 that existed prior to the crisis. The chances of the Lira ducking this fate can be rated as close to zero given the overall conditions prevailing in Turkey today.

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