Russian Macro: Adjusting to a new reality
As time goes by, trade relations between Russia and the EU that used to be Russia's major trade partner are shrinking. Sanctions on Russia gradually kept evolving into something which Iran had experienced for decades, keeping its economy alive, albeit in a rather peculiar fashion. At this stage, it is hard to imagine in detail what kind of economic structure could emerge in Russia and how the country's economic policy may evolve. However, several factors indicate that the Russian economy has already entered a rather new and peculiar era under mounting external pressure. The balance of payments and the ruble, both exceptionally strong, are just two of such factors. A too strong ruble will at some point start pressuring the tradable sector of the economy as it is not yet clear at this stage how the current account balance may narrow (unless the oil price falls considerably) as imports from the EU and other "unfriendly" countries will remain restricted while Russia's domestic demand is not going to bounce back rapidly. Hence, the ruble is likely to stay too strong for some time.
Russia's exceptionally strong external position, stable budget, reasonable macroeconomic policy, and low external debt are currently the main pillars that support its macroeconomic stability, including the rapid disinflation seen in the past two months. Though this stability alone cannot guarantee that the economy can easily bounce back and deliver steady growth. Therefore, the government will be forced to concentrate on the exchange rate and find a gentle way to weaken the ruble in the near term. The country needs weaker ruble to allow domestic manufacturers to be more competitive not only on the domestic market, but also in “friendly” jurisdictions if Russia wants to continue exporting there. Strong ruble could be helpful if Russia had opportunities to continue modernizing its economy by importing “unfriendly” investment goods and technologies. These opportunities, however, no longer exist.
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