It’s tempting for some I guess to acclaim the rally back in the ruble (from over 100 to the USD early after the Russian invasion of Ukraine to mid-60s now) as some great bellwether of the strength and durability of the Russian economy, and the talent of its economic policy elite.
But the reality is that ruble trading is now pretty thin/illiquid, and this is a heavily regulated/managed market. The Central Bank of Russia is now part of the Kremlin’s info war, and a strong ruble is part of the campaign being waged against Ukraine and the West, and also aiming to send a message to the Russian population that Russia is fine, and is resisting Western aggression in the form of sanctions.
The CBR continues to hold the ruble through a combination of capital controls, export surrender requirements, FX intervention and higher policy rates. On the latter, the CBR hiked the policy rate by over 1,000 basis points after the February 24 invasion of Ukraine to 20%, and while since cutting rates since to 14%, such high rates will put the dampener on the real economy. Indeed, herein, expectations are that Russia will experience a recession to the tune of minus 8-12% this year. This is obviously going to cripple import demand and therein will help support the ruble.
It is though important to highlight that slamming on the brakes, and accepting a huge and deep recession, is hardly “good” for the Russian economy. It’s not as though this is all painless.
I would also counter the view that the war has been great for Russia’s balance of payments; that Western sanctions are causing some kind of energy and commodity price boom, and this is pushing the current account into a big surplus, and that Russia is now somehow rolling in Western petro and commodity dollars.
Actually, observation of CBR official FX reserves kind of tells a different story herein.
Since the invasion of Ukraine reported data suggests a $50bn loss in official FX reserves, which have fallen to something around the $593bn mark. Now let’s just think here that if a commodity export boom is under way and imports have collapsed, then the current account should be posting record surpluses, which should be buoying the ruble and, presumably, putting upward pressure on reserves. FX reserves should be rising. They are not.
We cannot really prove any of this as the CBR has stopped publishing much data, including Balance of Payments series. Clearly, they have something to hide.
What is likely happening is that while commodity export prices are elevated, Russia is struggling to find as many willing buyers, with difficulty getting ships and insurance to transport crude and commodities. Import demand has likely collapsed, which will help the BOP.
But counting against all this, likely is that capital flight has stepped up a gear. Indeed, looking at partner country BOP data, particularly in the former Soviet space, we are seeing a big step up in remittance flows and capital flight from Russia.
So, the strong ruble reflects managed markets, capital controls, and intervention, but underlying all this is a weight of capital flight. And those 3-4 million Russians who have left the country to date have likely taken a lot of FX out with them.
Now while the CBR might be able to sell a message of a stable ruble in the short term, over the longer term the outlook for the ruble and Russian markets and the economy is surely dire.
Presumably once a peace deal is signed, war risk will be priced out of commodity markets, which will likely drop precipitously.
Russia will suffer the double whammy as, irrespective of the outcome of the war, it is now seen as an unreliable partner by the West, which will fast track diversification away from Russian commodities. There is obviously a debate here about the scope and timing of a European energy embargo, but whether or not that happens this year or next, what is clear is that over the medium to longer term Europe will be buying far fewer commodities from Russia. So this bodes ill for Russian commodity export revenues, which could well collapse.
So, if the saving grace for Russia is buoyant commodity export prices, don’t hold your breath, this benefit will fade pretty quickly, while broader sanctions will remain in place for an extended time and likely as long as Putin remains in office. This means a dearth of capital, investment and technology, which is going to doom Russia to generations of low or subpar growth and decline.
Russia’s economic outlook is absolutely dire as long as Putin remains in the Kremlin.
Timothy Ash @tashecon blog
The views expressed in this article are the author’s and not necessarily those of the Kyiv Post.
