Russia : a restless summer?

Note kindly translated by Anne-Marie de Grazia

We recorded, over the last days of July and early August, a new depreciation of the exchange rate of the rouble to the Dollar. In nominal terms, we have reached levels comparable to those of last December. Yet, we are clearly not confronted to a problem of speculation, as was the case in December 2014. It is easy to understand what is lurking behind this depreciation, but more complex to grasp what will be its consequences in the middle term.

Rouble, dollar and oil

The evolution of oil prices (essentially those of the BRENT index) on the rouble are undeniable. This is due to the importance of oil in the budgetary and financial mechanisms in Russia, not to its share in the production. The share of oil in the tax receipts of Russia is indeed important.

Table 1

Share of the receipts

In % of consolidated budget
2010 2011 2012 2013 2014
Oil (and derivatives) 28,5 31,9 32,7 32,2 33,2
Gas 2,3 3,2 3,7 4,3 4,1
Others 69.2 64.9 63.6 63.5 62.7

Source : Data of the Ministry of Finances of Russia


While activities of extraction (oil and gas) and refining make up only 10% of GDP, we observe that oil represents 1/3 of the state household receipts, and gas about 4%. This expresses well the fact that Russia’s fiscal policy has been based on capturing the returns to be made from fossil fuels. But the impact of fossil fuels is not limited to the sole budgetary receipts. The returns from exports of fossil fuels which are repatriated to Russia are considerable in the financial balance of the country.

Table 2

Share of the repatriated incomes from exports in %

Years 2010 2011 2012 2013 2014
Oil (and derivatives) 51,2 50,9 54,2 53,7 54,2
Gas 13,8 12,1 11,3 12,0 12,8
Total 65,0 63,0 65,5 65,7 67,0
Others 35,1 37,0 34,5 34,3 33,0

Source : Data of the Ministry of Finances of Russia


It is good to remember that the currency in which contracts are negotiated remains by a wide margin the US Dollar, even if the contracts can be paid in an other currency. The distinction between the contract currency and the currency of payment is a common one in international trade. Yet, it has an important consequence: when the rouble depreciates in relation to the US Dollar, the budget’s incomes in roubles and receipts in roubles increase. This is the reason why, in a time of a decrease in oil prices, it is logical for the Russian authorities to let the rouble depreciate. One must therefore compare the nominal exchange rate with the real exchange rate (corrected by inflation) corresponding to a given oil price, knowing that costs of extraction and of transportation at which companies operate at a profit amounted to around 3,000 roubles a barrel in December 2013.


Graph 1

 A - Change nominal et petrole

We notice that the exchange rate of the rouble corresponds more or less to a price of 55 dollars for the barrel. As it happens, the price of BRENT is, on this Tuesday September 1st, of 53 dollars. The evolution is normal, therefore. The recent movements in the exchange rate are not due, as was the case in December 2014, to a speculative crisis. They correspond to the evolutions necessary to assure the financial stability of Russia. We notice moreover that the recent fluctuations did not provoke any panic in Russia. Additionally, the level of the reserves of the Central Bank of Russia has been stable for many months, which shows that we are indeed in a radically different situation from December.

Graph 2

 A - BCR Réserves de change

Exchange rate and competitiveness

However, the exchange rate does not only establish the conditions of financial equilibrium of Russia. It plays an important role when it comes to the economic equilibrium of the country. From this point of view, it is presently accepted by many economists that the exchange rate of the rouble was overvalued at the end of 2013. A depreciation was necessary, which was largely implemented during January 2014, that is, before the events in Ukraine.

Since, the currencies of several emerging countries have also depreciated. It is forthwith evident that the Russian government has engaged in a protectionist policy, and that it is seeking to develop the production potential of its own economy. From this point of view, a considerable depreciation of the exchange rate is a must. We notice that the gap with the exchange rate at the end of January (after a -15% depreciation) hovers today around-40%. The impact of this depreciation on competitiveness, internal as well as external, is sizeable.


Graph 3

Gap between the exchange rate and the exchange rate levels of December 2013

(Values deflated by inflation figures)

A - Ecarts de change réel

The impact of this strong depreciation on industry, but also on agro-industrial activities, is beginning to make itself felt. The production costs of industry expressed in dollars have become very interesting, allowing Russian industrial groups to increase their presence in exports, to reconquer parts of the domestic market but also to increase their profits to make them able to invest. The latter effect should become manifest in the coming months. In the agricultural and agro-industrial area, the strong depreciation of the rouble, combined with the embargo on agricultural products coming from the European Union, has translated into a noticeable improvement in economic conditions in agribusiness. Not only is Russian production in the process of winning back its own market, but it is beginning to show progress in exporting. Exports should no longer be limited to grains, but begin to include processed foods and meat.

It is evident that, from the standpoint of production, the strong depreciation of the rouble has brought many advantages. The very low level of unemployment in Russia at present expresses the fact that we are dealing with a recomposing of the economy which is refocusing on national productions. Yet this recomposing is far from finished. It will need to force important changes upon the institutional framework in order for the processes of business creation and innovation be able to give their full measure. One can see, by the example of Russia, that a strong depreciation in the exchange rate of a currency can be beneficial, but that it is not enough. It is a necessary condition for a mutation of the economy to occur, but not a sufficient one.


Exchange rate and inflation

It is true nevertheless that a strong depreciation of the exchange rate can trigger strong inflation. In fact, the latter was in the area of 15.6% in August (over 12 months) and should go back down to 12.5% in December. But inflation was at around 6% in December 2013, at a time when the exchange rate was stable. We can deduct from this that there is a structural component in the inflation (probably around 6%) and a short-term component, at this time broadly induced by the depreciation of the rouble, the level of which would be comprised between 9.5% (at present) and 6.5% (in the forecast for December). However, the depreciation of the rouble, in nominal terms, over the past 12 months, has been of -41%. This implies that the inflation effect induced by the depreciation of the currency would be around ¼ of the size of this depreciation. This is an important point to remember. Even in the case of a very strong depreciation of the exchange rate, and even for a country which is heavily dependent on imports, such as Russia, the inflation effect produced by a depreciation turns out to be limited.

However, the effect of this inflation must also be considered in relation with the interest rates levied by the banks. From this point of view, it is clear that this rate is dependent on the base rate of the Central Bank (today at 11%), but that the commercial banks, with the exception of Sberbank, are practicing very high margins. For businesses, the interest rates are presently at 14-15% on average for the big companies, and at 16-17% for the small and middle-sized businesses. This implies that statically, for the big companies, we are in a situation of negative rates. Dynamically, and taking into account the forecast of a decrease in inflation, the real rate should establish itself around 1.5% – 2.5% for the big companies and 3.5%-4.5% for the small and middle-sized businesses. This corresponds to a sizeable improvement in the credit situation, not only in relation to the beginning of this year (were the rates in static were largely positive), but also in relation to the years before. We are rediscovering here that, from the moment that you can master your own interest rates, the fact of having a sizeable inflation ends up in effect with low real rates, and even negative ones in some cases. This should have favorable consequences on investment. Yet, interest rates remain high for private households. However, we must note the sharp drop in interest rates on loans connected with the purchase of a car (at present between 13%-15% on a 1 to 3 years maturity) and the fact that loans relating to real estate (essentially mortgages loans) are in the process of decreasing strongly in real terms.

One can see therefore that, after having attempted to limit the speculative crisis by the way of a very sharp hike in interest rates in December, a hike which proved mistaken and which had nefarious consequences during the first as well as the second quarter, the Central Bank of Russia seems to have grasped that the interest of the economy resides in low real interest rates. This implies that the CBR will set aside its proclaimed objective of a reduction of inflation to 4%. A stabilisation of inflation, at 12% at the end of 2015, then at 10% in 2016, appears more compatible with the economic objectives which the Russian government is aiming at.


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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