The Russian ruble: settling in the comfort zone
During the pandemic-hit 2020, the Russian economy demonstrated that its ability to absorb external shocks is rather strong, as its GDP contraction was moderate, while in the past decade it demonstrated that it lacks strong growth drivers as the average annual economic growth was quite unimpressive. The relative flexibility of the exchange rate was one of the major shock absorbers, which helped the budget and domestic producers to weather the storm. The exchange rate flexibility can be considered relative, as the existing fiscal rule stipulates that the authorities, such as the Minfin/CBR duo, have to buy or sell FX depending on the deviation of the actual oil price from the budgeted one. This essay provides more color on the evolution of the exchange rate in 2020 and potential trends in 2021.
In a more or less calm market environment the oil price (which can work as a proxy for commodity prices in general, including gas and metals) remains the most important factor that determines the ruble exchange rate as it strongly influences the current account. Domestic monetary policy, local interest rates, capital flows, the debt servicing schedule and budget execution are also among important factors that affect the exchange rate in the short term. Longer-term, however, the role of the oil price grows in importance. The dependence between the exchange rate and the oil price looks linear during “calm” periods, but at some point, however, the line shifts up, i.e., the ruble weakens. These tipping points are usually associated with some shock – either external or internal. The magnitude of an upward shift of the line could be interpreted as an adjustment to domestic inflation. Indeed, it would be abnormal to see the nominal exchange rate of the ruble stable for years while domestic inflation has consistently exceeded that in the benchmark country.
Apart from these shifts of parallel lines higher, occasionally the line could rotate, depending on changes in monetary policy. Policy easing makes the dependence steeper, tightening flattens the line. Going forward, the ruble is likely to fluctuate along the recently established trajectory following the movements of the oil price in the medium term, as monetary policy is neither going to ease nor tighten, i.e., the line will not rotate. Therefore, the ruble price of oil fluctuating around R4,000/bbl looks to be a kind of temporary equilibrium, comfortable for the federal budget.
Now read on...
Register to sample a report