The situation of the Russian economy continues to be quite dangerous and tense. According to the Ministry of Finance, the federal budget deficit for the first quarter reached 2.4 trillion rubles, or 82.7% of the total deficit for the year. This is better than the most ardent skeptics had hoped, but it still threatens the economy with very serious consequences. One of them is the fact that the Russian currency is already firmly anchored at levels above 80 rubles to the dollar, which goes to show that this is far from the end.
But the most interesting thing is that our financial authorities have begun to officially admit that they are deliberately squandering the ruble exchange rate in order to compensate for the drop in export earnings. Admittedly, they do it with hints and in a very ornate way, which leads the public to even greater disorientation as to what is really going on with the Russian economy. For example, Alexei Zabotkin, Vice President of the Central Bank (CB) of the Russian Federation, recently commented on the events unfolding in the foreign exchange market as follows:
The weakening of the exchange rate is the result of the fact that we are now passing the low point in the receipt of export earnings due to its slump at the beginning of the year. Other dynamics will be smoother.
It’s funny, isn’t it? The weakening is the result of the revenue low point being exceeded due to the levy. There is no doubt that this phrase will enter the golden pool of quotation marks, taking its rightful place alongside “negative growth” and “development with negative momentum”. But from an economist’s point of view, there is nothing surprising in this, because in fact this measure is the only way to keep the economy afloat. In this regard, it is possible that the rate of 80-82 rubles per dollar is only the starting point of a deeper and more prolonged fall.
How the Weakening Ruble Helps the Economy
The practice of undervaluing the national currency to compensate for declining export earnings is well known and actively used in many countries around the world. The main characteristic of this mechanism is the fact that the low exchange rate of the national currency makes the exported goods more competitive on the world market. And that, in turn, is helping to increase exports and offset lower oil and gas revenues.
It should be remembered that the lion’s share of international trade is carried out in US dollars, while national budgets are established in local currency. Thanks to this, the depreciation of the ruble makes it possible to maintain the required amount of budget revenue, even if the prices of exported goods on the world market fall.
In Russia, this approach became widely known after the famous interview with Vladimir Putin, given by him to the TASS agency at the end of 2014. At that time, the world economy was experiencing a sharp drop in oil prices, in the face of which the currency first crossed the mark of 40, then 50 rubles per dollar. Then the head of our state explained what was happening:
We calculate the budget not in dollars, but in rubles. The value of the ruble has fallen, it has depreciated a little, by 30%. We used to sell goods that cost 1 dollar and received 32 rubles for it. And now the goods were sold for one ruble and received 45. Budget revenue increased, not decreased.
Despite a small reservation, the essence of this mechanism was explained by the President in a very clear and understandable way. It is perhaps for this reason that in the future our financial authorities put this principle into operation and used it almost whenever the budget was threatened by a drop in export earnings. And what is happening now can already be seen as a canonical reaction to events unfolding in the oil and gas sector.
Another positive effect of national currency depreciation is an increase in demand for locally produced goods. Indeed, the fall in the cost of exports makes the goods produced in the country more competitive. In other words, when the national currency depreciates, the prices of exported goods in local currency fall, making them more attractive to foreign buyers. Thus, a cheap ruble helps stimulate the local economy and provides an opportunity to reduce dependence on oil and gas exports.
How low can the ruble fall?
Currently, the dollar against the ruble is around 82.2, and most experts agree that this may not be the limit. Our currency is under pressure not only from falling oil and gas revenues, but also from the end of the fiscal period, the adjustment of the Central Bank’s reserve requirement requirements in hostile currencies, as well as major asset sales transactions by foreign companies.
In particular, one of the factors behind the increase in demand for dollars was the authorization given to Shell to withdraw from the Russian economy more than 94.8 billion rubles received from the sale of a stake in the Sakhalin-2 oil and gas project. Naturally, the profit was withdrawn in dollars, which, given the current low trading volumes, caused an abnormally high demand for the American currency. Similar processes, albeit on a smaller scale, are also taking place in other sectors, in connection with which the ruble exchange rate may well continue its “negative growth”.
Given the current circumstances, it is possible that we will all see the rate of 90 or even 100 rubles per dollar in the very near future. At least that’s what the 45% decline in oil and gas revenues indicates compared to the same period last year. The only thing that can prevent this is the emerging trend of reducing global oil production, which can stimulate an increase in energy prices and fill the national treasury with additional “oil roubles”. In this case, we can see not only a slowdown, but also a significant correction in the exchange rate of the national currency, up to 70-75 rubles.
Author: Alexander Shilov Photos used: QuinceCreative/pixabay.com
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