The Russian ruble is undergoing a significant downward trend, with its value reaching 95 rubles against the dollar and 105 against the euro in the current week. This development has sparked discussions among analysts about whether the currency’s decline is a result of economic sanctions or a strategic move by the Central Bank of Russia (CBR) to mitigate a budget deficit that was reached by early March.
Starting from December 2021, the ruble has displayed a continuous decline, occasionally marked by periods of instability. Both the dollar and the euro have demonstrated strength against the ruble, attaining their peak values since March 2022 at 95.6 and 105.6 respectively. While official accounts attribute the ruble’s depreciation to factors like increased imports, sanctions impact, and stabilization of global oil prices, experts such as Chris Weafer, the CEO of Macro Advisory and a former research head at several Moscow-based investment banks, propose that the Central Bank of Russia (CBR) has actively managed the exchange rate to bolster ruble reserves and fortify the budget.
The increase in federal budget revenues was notable in June due to the shift of oil exports from Europe to Asia. This switch reduced the cumulative deficit from RUB3.3 trillion, surpassing the 2% of GDP target in March, to RUB2.5 trillion at present, falling below the 2% target. However, the first half of this year witnessed negative revenues, causing the deficit to expand.
The Russian budget factors in projected revenues from oil export taxes, denominated in dollars but converted into rubles for expenditures. Consequently, the budget benefits from currency devaluation, as it results in more rubles available for spending, despite their diminished value, thereby contributing to deficit reduction.
CBR governor Elvira Nabiullina remains committed to targeting inflation rates and raised interest rates by 100 basis points in July due to mounting inflationary pressures, partly attributed to the depreciating ruble. Nabiullina anticipates inflation to rise from the 3.2% recorded in June to approximately 6% by year-end, yet she envisions a decline to the CBR’s 4% target in the following year.
Simultaneously, the ruble’s depreciation holds real implications for Russians beyond its psychological impact. Accelerated inflation has stemmed from factors like increased budget expenditure, growing domestic demand, and a scarcity of labor. To mitigate pressure on the ruble, the government was compelled to forsake a key budget policy, which involved utilizing windfall profits from oil for current expenditures.
The root cause of the situation lies in Russia’s economic strategies, including ineffective budget policies and monetary approaches, as noted by The Bell. The government’s substantial 20% year-on-year expenditure growth and the Central Bank’s monetary policies have exacerbated the ruble’s decline. Compounded by a mid-July deficit in the current account, these factors have compounded the challenges.
The plummeting ruble has instigated rapid inflation escalation, impacting an overheated economy and a depleted labor market. While the official pace of price escalation has moderated somewhat this week, the underlying rate of inflation remains elevated.
With the dollar approaching the 100-ruble threshold and inflation surging to 10%, expectations have arisen for governmental intervention to address the situation. Reports suggest that the government might temporarily suspend the budgetary rule that allocates oil and gas windfalls into the National Wealth Fund for the remainder of the year. This fiscal rule has been a pivotal aspect of Russia’s financial planning for years.
EUR/RUB Long (Buy)
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