The next fall of the ruble. What then?
The ruble has been in a sustained nosedive for a protracted period and short-term stabilization of the national currency every time a new low is reached has done nothing to alleviate its continuing decline. In order to bring economic policy in line with the current reality on the ground, and in an implicit acknowledgment of the current market situation, the government has decided to revise its earlier forecasts. The new scenario would have been called pessimistic several months ago; however, today, the majority of experts support the forecasts and, indeed, 70 rubles per dollar is the reality that Russia faces right now.
An Official Commentary on Russia’s Economic Situation
Mr. Alexey Ulyukayev, Minister for Economic Development of the Russian Federation, shared his opinions on Russia’s economic situation with the news agency Interfax. Mr. Ulyukayev believes that the number of positive developments for the Russian economy in the near future will be significantly fewer than those previously expected. Economic growth is possible in 2016; however, it is unlikely to exceed 1%. The ongoing financial crisis means that government representatives have to recognize the undesirable reality of the economic situation and to exercise a great deal of caution when issuing forecasts.
In parallel with the revision to key economic forecasts, the average annual exchange rate of the national currency against the dollar was revised, as .61 Rubles per 1 US dollar is no longer relevant. Most Russian economists agree that, by the end of 2015 and into 2016, the Ruble is more likely to lose further ground. As such, it is clearly too early to contemplate strengthening the currency at this juncture.
Mr. Ulyukayev also believes that the adverse scenario for the Russian economy – caused primarily by a sharp deterioration in the price of crude oil – will make it difficult to replenish the Reserve Fund in the near future. However, this news is not entirely pessimistic, since the ability to save accumulated funds is a very real possibility at present. While it makes no sense to discuss zeroing of the fund in the next two years, it will be necessary to forget about additional incomes.
The Russian Government’s Forecast
According to a recent article about the Russian Federation that was published in the magazine ‘Kommersant,’ the Ministry of Economic Development believes that the Ruble could decline by a further 18.2% by the end of this year. New forecast documents prepared by the Government contain data on various indicators up to 2018, and these figures are used by the government to organize the process and planning of various budget estimates. Despite the negative forecasts of the majority of Russian experts and world financial institutions, officials still hold the central view that, by the end of 2016, the price of a barrel of oil will remain at a level above $50.
This could be considered quite a cautious forecast given the average price of oil over the last decade; however, in reality, it is somewhat optimistic, and the government may indeed be preparing for a worst-case scenario. For instance, the Economic Ministry hopes that, in 2017, Russia will be able to sell oil at $55 per barrel, and in 2018 the price will increase by a further five dollars to $60 a barrel. At present, however, official documentation is also planning for the price of oil at $38.7 per barrel, while the rate of the national currency is 70 rubles per dollar.
Currency Forecast From Leading Russian Financiers
German Gref, a well-known Russian statesman, financier and president of Sberbank, Russian’s largest bank, has a more optimistic point of view. He believes that the fair value of the ruble in 2015 is no more than 58 rubles per dollar and that active selling of dollars in the foreign exchange market will help to strengthen the national currency and help it to recover from its current low. Mr. Gref is confident that, by the end of the year, the exchange rate will be no lower than 60 rubles per dollar and also maintains an optimistic view on the average annual price of oil. In his opinion, the average price per barrel at the end of 2015 will be $60 USD, though time is running out in which such an outcome can be achieved, with Brent crude struggling to build momentum above $50 a barrel.
The ruble has been in a sustained nosedive for a protracted period and short-term stabilization of the national currency every time a new low is reached has done nothing to alleviate its continuing decline.
Natalia Orlova, chief economist at Alfa Bank, has an equally optimistic forecast. In her view, the fair value of the ruble in 2015 is 59 rubles per dollar, and the cost of a barrel of oil will range from 55 to 70 dollars. Ms. Orlova believes such a course of events is possible if the Federal Reserve does not tighten monetary policy and the situation in the Middle East remains relatively stable.
Experts at Deutsche Bank are inclined to believe that the US dollar will continue to strengthen until the end of 2015. Many countries are currently engaging in what is being termed as ‘competitive devaluation’ in a bid to stimulate their export and manufacturing sectors. The Russian Ruble’s devaluation can also be considered in the same light. The central banks of other countries do not have the ability to conduct monetary policy with the same freedom as the US authorities, due to its status as the world’s reserve currency, which provides stability for the US Dollar and gradual appreciation as interest rates rise.
How Real is the Possibility of Default?
Arkadiy Dvorkovich, Deputy Prime Minister of the Russian Federation, dismisses this scenario for the current year since Russia has enough options and resources to avoid potential problems and meet all of its obligations. However, he also believes that the situation at the corporate level is a great deal more unstable. Certain sectors could possibly experience not only technical defaults, but quite serious funding and liquidity problems. Though major strategic enterprises will survive, since they either have the scale to cope with the upcoming problems on their own or will receive assistance from the government.
Independent Analysts’ Opinion
Igor Nikolaev from CFF has warned against talk of the Ruble ‘reaching the bottom,’ since there could be no bottom whatsoever given the fact that the situation in the country and world at large is too unstable to discuss specific limits, levels or ranges. The broader geopolitical and economic situation has deteriorated rapidly and unexpectedly. The price of oil continues to stagnate, dragging down the Russian Ruble, depleting reserves and putting pressure on government budgets. Events will run their course, and this scenario will not persist forever; however, predicting when oil prices will recover is not an easy task.
Sergey Romanchuk from Metallin Westbank thinks that the fall in the value of the ruble is related to the current oil market where oversupply has had a disastrous effect on prices (as far as producers are concerned). As long as oil prices remained moderately high, stability was taken for granted, and nobody expected how quickly that stability would unravel or just how negative the situation would become. The oil price collapse has been compounded by the onset of the Ukrainian conflict and the imposition of western sanctions. Russia has been left without access to the usual credit markets to raise funds at precisely the time it needs to do so. The severe blow of rapidly falling oil prices has reduced Russia’s foreign currency earnings and, eventually, this could cause problems financing external debts of both corporations and the government. It could be some time before the Ruble regains the status and stability it enjoyed just 18 months ago.
Andrey Dyachenko from “Alfa-capital” Management also thinks that the Russian Ruble is wholly dependent on oil prices and this dependency is easily demonstrable. Over the long term, it can be useful to examine the development of the American dollar and the strong connection between the price of oil, the Ruble and the US Dollar, which has been strongly negatively correlated with the price of oil since 2000. So studying ruble exchange rate fluctuations is necessary to gaining insights into both the changes in oil prices and the behavior of the American dollar and how it exerts such a strong influence on commodity prices and global markets in general.
Opinion of Foreign Financial Institutions
Sometime before the changes to the forecasts were made by the Russian government, Morgan Stanley analysts concluded that a fall in Russian economic growth was the most probable outcome of late 2015 and early 2016. The falling value of oil on world markets continues unabated, with no sign of relief on the horizon. This featured in the Global Macro Outlook, a popular review that is published on behalf of the financial conglomerate. American economists at Morgan Stanley predict Russia’s GDP will drop 4.2% by the end of the year, with a lackluster 1.3% rebound in 2016, rising to 1.7% in 2017.
Moody’s rating agency have also revised their forecasts for Russian economic growth, albeit only slightly. Instead of zero growth, Moody’s analysts are now predicting Russian GDP to drop 0.5-1.5%, mostly because of the fall in oil prices and the weakness of the ruble.
Based on these forecasts, the current impression is that, both this year and next, the Russian economy is at the mercy of international financial markets, with events mainly dependent on the future path of oil prices and the value of the Russian Ruble on foreign exchange markets. The current state of affairs may be improved if Russia can work with its international partners to at least alleviate some of the pressure.