Russian macro: Watch the exchange rate—nothing else matters (so far)
Over a decade ago, when the oil price bounced back after the 2008 crisis and remained above $100/bbl for some time after, the Russian economy grew fast enough (4.0% in 2012, for instance). Economic growth was also fueled by rapidly expanding household credit, while an overly strong ruble caused imports to soar. Meanwhile, the ruble rate was manipulated by the CBR at that time as the latter kept the currency floating within a kind of range. As a result, speculative pressure was mounting on the ruble, while household debt servicing was becoming more costly amid high interest rates (even though total debt was low relative to GDP). The succeeding years resulted in deleveraging and an adjustment of the exchange rate. The ruble weakened as the oil price corrected. The weakening of the ruble and its move to an equilibrium was the most essential part of the country’s macroeconomic adjustment at that time. The adjusted ruble exchange rate supported domestic manufacturing and trimmed imports. It also helped to boost federal budget revenues amid much lower oil prices.
We see many similarities between those years and the current macroeconomic environment. Hence, the exchange rate is a key variable to monitor as the magnitude and direction of the ruble’s pirouettes have been well above expectations in recent years while the Russian currency is still in search of its equilibrium. At some point the ruble should find it. However, currently, too many indicators point to various macroeconomic imbalances. A too strong ruble negatively affects the federal budget as it trims oil-and-gas revenues. It also cuts the VAT on imported goods. If the ruble remains too strong for a long period it will force the government to adjust its macroeconomic policy, including budget spending and/or ways of financing the deficit. We expect the ruble to eventually weaken, but it is unlikely to be a straightforward move toward USD/RUB 90 and above because too many policy and regulatory obstacles are still in place.
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