Ruble: rise on the air

This note has been kindly translated by Anne-Marie de Grazia

La question coming up now, after the events of last December and the speculative crisis which intervened, is how far the Ruble will rise by the end of 2015. Rising tendencies on the exchange market are beginning to assert themselves. They will amplify at the end of Spring and the beginning of Summer. It is time to ask the question of what will be the stabilizing point of the Ruble and what could be its consequences for the Russian economy.

A foreseeable movement

After having strongly depreciated since the end of October 2014 and until end of December, the Ruble has started to recover. It has come back to a level of 61 rubles for1 Dollar (USD). The factors which allow one to think that this movement is due to continue until the end of Spring beginning of Summer are numerous.

Chart 1

 A - TxdeChange

Source : Central Bank of Russia.

One can count on :

  1. The rise in oil prices. The drop seems to be henceforth stopped. One can expect prices to go up again by the beginning of Summer, to reach towards November 2015 between 70 and 80 USD a barrel. At this price, the equilibrium rate of the Ruble should situate itself between 41.5-47.5 rubles for 1 USD.
  2. The decreasing payments (payments back on loans) in dollars (see chart 1.) This decrease will diminish the demand for dollars on the Moscow market.
  3. The Russian economy adapting to the regime of financial sanctions decided by the United States which will translate into a lesser demand for dollars.


Table 1

Amount of redemption on loans (in billion dollars) per quarter

T3-2014 T4-2014 T1-2015 T2-2015 T3 2015 T4 2015 T1 2016 T2 2016
Interests 7,438 7,121 6,65 5,911 5,678 5,42 5,475 4,828
Principal 59,165 47,105 31,833 23,545 18,256 27,983 15,893 21,276
TOTAL 66,603 54,226 38,483 29,456 23,934 33,403 21,368 26,104

Source : Central Bank of Russia

These factors will favor a rise and one can reasonably expect that the ruble will return to the bandwidth of 45-55 rubles for 1 dollar, depending on the various parameters of the economy, in the « real » domain (the price of oil) as well as in the financial domain.

What level of equilibrium?

We must then ask the question of knowing what could be the level of equilibrium of the Ruble, taking into account at once the external financial determinants AND the constraints of competitiveness weighing on the Russian industry.

A strongly depreciated Ruble favors the development of industry, and of the economy in general, as one could note during the year 2014 when the index of industrial production strongly recovered, while the ruble itself was depreciating.

Chart 2

A - ProdIndustrielle

Source : Central Bank of Russia.

But this depreciation has also fed a strong inflation which should reach, on a year to year comparison, (or rate expressed as a percentage of the same month of the previous year) of 13% to 14% during the first semester of 2015. What is important then is the real exchange rate (RER) and no longer the nominal one. If one takes into account that, according to calculations carried out at the CEMI, the real exchange rate was overvalued by around 15% in December 2013, and taking account of inflation (or more precisely of the inflation difference) between Russia and its main trading partners, one should reach a rate, after compensating for the initial over-evaluation, of around 41 rubles for 1 dollar on 1st July 2015, progressing towards 43 rubles for 1 dollar by the end of 2015. This is what has been indicated as the “low limit” on chart 1.

Still, one must also take into account the interest rates which are at present very high. The interest rates implemented by the ECB? No! CBR  are indeed destroying the elements of substitution to imports which existed. The Central Bank will be the principal culprit of the economic disaster which is unfortunately looming. The rates on the loans to agriculture implemented by the commercial banks, in reference to the rates of the CBR, are at 25% and closer to 35%. Leasing companies, including para-public ones such as Rosselkhoz, are in the process of massively repatriating agricultural equipment at the least sign of a default in payments. As a result, agricultural producers cannot buy seeds and keep up their materiel. Many are in payment default since last year. One is already speaking of a 40% decrease in seeding now that the season is only beginning. Of course, an emergency assistance from the State has been decided. But this assistance is difficult to put in place (because of problems of inter-bureaucratic antagonisms existing within the Russian administration). A rise of the ruble would allow companies to finance themselves in foreign currencies with an effective interest rate far less elevated. A company borrowing in foreign currencies (even from a Russian bank) can stand rates of 35% if it can see the purchasing power of the ruble in foreign currencies appreciate by, let’s say, 25% to 30%. Inflation (which increases the nominal purchasing power of the company) compensating for the difference.

There is therefore a financial logic (but one which is important for industrial companies) which would want the ruble to appreciate (and from 61 rubles for 1 dollar to 42 rubles the appreciation would amount to 45%). But in the reverse, there is a logic of competitiveness for the ruble remaining below the limit of 45 rubles for 1 dollar.

The State, master of the game?

One notices then that if technically the ruble could come back to between 40-45 rubles for 1 dollar by the end of the year (all depending on the strength of the recovery of oil prices), it is politically preferable to maintain the exchange rate around 50 roubles for 1 dollar, in order to avoid a phenomenon of over-evaluation of the ruble.

The State can compensate for the high interest rates either by lending himself (out of two sovereign funds at its disposal and the cumulated amounts of which are around 180 billion dollars) or in « bonifying » the interest rates taken by the banks. The State takes over part of the interests and brings back the interests really paid by the company (or the individual) more or less close to the level of inflation. This latter technique, efficient but costly to the State budget, has been historically used in France until the end of 1980s.

We must also note that a future appreciation of the ruble will translate into a strong reduction of the imported inflation. Which is an advantage for the households but a disadvantage for the State whose receipts (direct and indirect taxes) rise in step with inflation. It would be logical therefore if the government chose a moderate appreciation of the ruble (bringing it back for instance at between 55 and 50 rubles for 1 dollar) but did not exploit all the potential of appreciation of the ruble. Nevertheless, other factors will certainly be taken into account, and particularly the political dimension of a strong appreciation of the Russian currency which could turn out to be useful for the part of the population whose consumption depends the most on imported products. From this point of view, one must understand that this factor will weigh in the more heavily, the more the popularity of Putin and of the government will be eroding. This is not the case for the time being, but nobody can say how the situation will evolve by the end of Spring.

Summing up, it is clear that one will see an appreciation of the ruble as early as from the end of Spring 2015, the exchange rate – in the present state of forecasts concerning the price of oil – could go from 55 rubles to 42 rubles for 1 dollar. This appreciation will also have consequences on the markets for stock market assets. It is probable that in March and April 2015 one will see massive buying on stable values (oil, metal, chemical and mechanical industries) with the aim of profiting from the appreciation of the ruble which will occur beginning May-July 2015. It remains to be determined which is the « floating » part of the shares in these companies, as it seems that the State has bought up relatively large quantities between end of October and end of December. If this floating part is relatively large, one should see a strong increase in rates as well as new pressures on a rise of the ruble.


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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