The Russian ruble continues to fall: on July 6, the euro at its peak reached 102 rubles, and the dollar exceeded 93 rubles. The last time the Russian currency recorded such weak performance was in March 2022. To find out why the Russian currency is becoming cheaper and how long it will last, Russian media spoke to economists.
Why the ruble is falling
Independent financial adviser, director of the Savings Growth Project, Sergey Kikevich, in a conversation with Russian media, noted that the ruble is determined by the balance between supply and demand in the market, that is, the level of exports and imports. The same is happening now: after a strong strengthening of the ruble, a “slide to a lower exchange rate” has begun.
“After the start of the special operation and the tightening of the sanctions, we had a collapse in demand, that is to say, there were very few importers, new chains had to be built. supply, switch from European suppliers to friendly Asian countries. When this happened at the beginning of 2022, the prices of energy resources were rather high, on the one hand, that is, there was a fairly large income from exporters, and on the other hand, there was little import demand. Therefore, at present, the exchange rate was about 50 rubles. per dollar. Now the opposite is happening,” Kikevich explained.
Thus, the increase in imports compared to last year’s figures and its rise in prices due to the sanctions have increased the demand for foreign currency among importers. At the same time, exporters began to decline –revenues fell due to falling oil and gas prices.
Economist Nikolai Kulbaka agreed that the ruble’s weakening is due to a combination of various factors, including a decline in exports and a partial recovery in imports. “First, Russian exports are starting to decline due to the restrictions, part of the foreign exchange earnings are still stuck with intermediaries abroad, that is, less foreign currency is entering the country. At the same time, in principle, imports have resumed, which means that the currency is needed to buy goods abroad. The demand for the currency is increasing,” he pointed out.
The third factor, according to Nikolai Kulbaki, is the sharp increase in capital outflows from Russia after the rebellion of Yevgeny Prigozhin.
“Apparently, the outflow of capital will now increase, because after the Prigozhin rebellion, risks in the economy have increased sharply, an additional scenario has appeared, and companies have become more active in withdrawing money. All of this led to the fact that the ruble began to sag,” Kulbaka added.
In addition, according to the economist, a large number of actors are interested in a cheap ruble – first of all, these are Russian exporters and the budget, that is, the Ministry of Finance.
“The Ministry of Finance must fulfill the budget. It is advantageous for him that the ruble is cheap, then he can do without turning on the printing press. In fact, that’s what’s happening – it’s just that the Russian economy is weaker and our inflation is not very low, so it all works against the ruble,” Kulbaka is sure.
Head of the Bank of Russia Elvira Nabiullina explained that the fall of the ruble is associated with the dynamics of foreign trade. According to her, the previous strengthening of the ruble was due to a sharp increase in exports and a decrease in imports in 2022, but now the situation has changed.
“If we compare the positive current account in the first quarter of this year, compared to the peak of last year, it fell five times. Therefore, the floating rate under the influence of foreign trade is changing. We have tools to smooth short-term fluctuations, but a floating exchange rate, in our view, is a boon that allows these external changes, these external shocks to be more easily absorbed by the economy,” said Nabiullina during the plenary session of the Financial Congress.
Another reason for the weakening of the ruble could lie in the relocation of the economy, believes Sergey Kikevich. According to him, major oil and gas exporters, before and after the start of the special operation, withdrew part of their profits abroad, and then, de jure, foreign companies invested in Russia.
“Therefore, despite the fact that we have a positive balance of trade, everything seems to be normal, but the money is still going abroad to these same offshores, only some have moved from Cyprus to the United Arab Emirates. The government is closing eyes on this. Therefore, in order to balance the ruble exchange rate so that the deficit budget is replenished, it is beneficial for the government to have a low ruble exchange rate,” he explained. .
“Then it turned out that the budget will not be very rare, but slightly rare, but at the same time we, like ordinary people, have high inflation, an increase in the price of all imported goods,” added Kikevich.
When will the fall of the ruble end
According to Nikolai Kulbaki, now “the ruble has not fallen much”, and the fall in 2022 was much greater in percentage terms. At the same time, he agreed that in absolute terms, the current drop is quite significant. There is no limit to the fall of the ruble, according to economists.
“Everything will depend on the state of the Russian economy, the state of exports, imports, how military operations will be conducted, the strength of risks in the Russian economy – that is, say that there are a lot of factors. Therefore, it is very difficult to predict the exchange rate of the ruble, but for now it will go down,” said Kulbaka.
The fall may not be continuous, the economist is sure. According to him, some fluctuations are quite likely. “But now the Russian foreign exchange market is increasingly separated from the global financial market, and therefore foreign speculators play little in it, basically it’s just the ratio of exports and imports and the outflow of capital,” he said. Kulbaka.
Sergei Kikevich agreed that national currencies tend to weaken over long periods, as this is beneficial for the state and exporters. In the long term, according to the experts, we can expect a gradual weakening of the ruble.
“But if we are talking about the near future, about a year or two, then it is an absolutely unpredictable story. The rate can reach 100, 150, 200 and then go back to 50. Many factors influence the formation of market demand and at the same time each of these factors is very unpredictable, especially the situation of offshore companies. The emergency measures as a trump card are still in the pocket of the government, but no one wants to apply them,” Kikevich emphasized. .
Kulbaka agreed that the Central Bank will probably no longer actively fight to stop the ruble’s slide. The only effective method in such a situation, according to the economist, is to sell more foreign currency in the domestic market, while Russia does not have it.
“The problem is that the more the Central Bank tries to stop the exchange rate, the more inflation will increase in the country. And inflation is a more important indicator for the Central Bank, so it is most likely that less attention will be paid to the exchange rate,” Kulbaka added.
How the fall of the ruble will affect Russians
Economists also agreed that the weakening of the ruble would cause the price of most goods to rise. The first price increase will affect imported goods and services.
“Most likely, by the end of the year, the price of trips abroad in rubles will increase, since inflation does not react instantly to the ruble exchange rate, but with some lag, sometimes two or three months. If the exchange rate continues to grow, we will see an increase in the price of other seemingly unrelated things – what we consume every day will go up a little more,” concluded Kikevich.
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