The Russians will still remember the times when the dollar was 60 roubles, with nostalgia.
Photo: Mikhail FROLOV
A dollar at 60 was great. I think we will still remember these times with nostalgia. For almost the entire year, the ruble was strong despite all the sanctions and other problems in politics and the economy. But now the dollar and the euro are catching up. Another week started with a dashing jump. Both world currencies added more than six percent each. The euro jumped the mark of 73 rubles, and the dollar stopped at the level of 68 rubles. What’s happening? What are the reasons for such drastic changes? And what will happen next?
Reason 1. Cheap oil
Problems in the global economy are beginning to affect commodity prices. Oil is trying to stay in the $80 per barrel area. But it is hardly possible. Global demand is declining. When countries don’t have the money to buy raw materials, prices inevitably fall. And it looks like even OPEC+ production cuts are unlikely to change the situation much. Yes, it will smooth out and slow down the fall, but no more.
And for Russia the situation is even worse. Our oil is sold at a big discount. For example, from November 15 to December 14, the average selling price of our Urals was $57.5 per barrel. And this is despite the average price of Brent in the same period – $ 86 – 87. Our exporters have to throw off a third of the cost. Plus, the Europeans introduced a price ceiling.
– In general, the weakening of the ruble can be considered a continuation of the trend of recent weeks and the result of a combination of a number of factors. Thus, the Russian currency remains under pressure from new sanctions and sagging oil prices. At the same time, market participants cannot yet objectively assess the full-fledged effect of the introduction of a price ceiling for Russian oil, but they are likely to play out an unfavorable scenario for the ruble in advance, in which a decrease in export foreign exchange earnings is expected next year, – says Yuri Kravchenko, head of the analysis department banks and money market IC “Veles Capital”.
At the same time, government spending is on the rise. Largely due to spending on defense and security. There will be a deficit of several trillion rubles this year as well. You will have to live in debt for the next three years. This is included in the federal budget. And the lower the cost of oil, the less taxes oil companies pay. So, one of the ways to increase them is to lower the ruble exchange rate. With an oil price of $100 per barrel, even a large discount did not look critical. There was enough money. Now the situation is no longer so rosy. Therefore, in order to fulfill the obligations of the budget, one variable must be changed in the calculation formula.
– The main reason for the sharp weakening of the ruble is its unreasonably overvalued exchange rate, which for several months now has an increasingly negative impact on state budget revenues and exporters. In addition, over the past six months, oil and other raw materials have significantly fallen in price, significantly reducing export earnings entering the country compared to the peak values of 2022, ”explains Dmitry Babin, an expert on the stock market at BCS Mir Investments.
Reason 2. Slowing inflation
The cheap ruble has one negative factor – it provokes a rise in prices. We have always had a large share of imported products. Now, of course, it has decreased, but not so much that its influence has sharply weakened. And the cheaper the ruble, the more expensive foreign products. Sellers have to raise prices in stores – and this is reflected in general inflation.
In recent months, prices in Russia, on the contrary, even fell. Or they stood still, which is also good. This means that the prerequisites for accelerating inflation have disappeared. And a small change in the course is unlikely to have a big impact on the overall indicator. Moreover, although the volumes of imports are growing, they still do not reach last year’s values. And the Central Bank left the key rate unchanged – around 7.5% per annum. This is quite high, which means it will hold back further price increases.
Reason 3. Printing press.
Explicitly, most countries no longer include the printing press. But indirectly from time to time they support their own economies. Thus, the US and Europe have been actively printing money in the last 12-13 years – immediately after the 2008 crisis and during the pandemic. For this, government bonds were issued. That is, they borrowed money from financial institutions or private investors. And the received money covered the deficits of their budgets. The Russian authorities have begun to do something similar in the current conditions. The Ministry of Finance is rapidly issuing federal loan bonds. The Central Bank does the same.
– Let’s not forget that the Bank of Russia “prints” money through REPO operations at a record pace. The growth of the dollar is its reaction to the “Russian QE” (QE – Quantitative easing, “quantitative easing”, that is, an increase in the money supply in the economy. – Ed.), – analysts of the InvestFuture portal explain.
For example, in November-December, the Central Bank placed almost 1.5 trillion rubles in banks (this is what is called REPO auctions). In quiet years, the amount was many times less. Such a volume can only be compared with the financial assistance that the authorities provided to the market during the pandemic – in 2020.
Reason 4. Growth of imports
If we are not doing very well on the export market. Volumes are shrinking. Gross revenue too. The situation is improving with imports. Business is finding more and more workarounds. Some of the goods are delivered directly, some – under the scheme of parallel imports. This creates additional demand for the currency.
For example, since May, 2.4 million tons of goods worth over $20 billion have been brought into the country under the parallel import scheme, Head of the Federal Customs Service Vladimir Bulavin said on Monday.
Reason 5. Investor behavior
The dollar exchange rate is determined by the ratio of supply and demand on the currency section of the Moscow Exchange. There are no large financial institutions there now. Exporters and importers rule the ball. At the same time, the share of private investors increased. Many of them buy currency on the stock exchange, transfer it to an account in a Russian bank, and from there to their foreign account. SWIFT transfers are still possible through some major banks. And the limit is big – $1 million per month.
– Wavelike demand of the population for currency is another important factor influencing the ruble. This year, the population is actively involved in operations in the foreign exchange market. In 10 months of 2022, Russians accumulated more than $69 billion in foreign bank accounts, mainly in US dollars and euros. This year shows that the threat of sanctions, geopolitical risks, and similar factors can trigger a surge in demand for foreign currency, – says Sergey Konygin, Senior Economist of the Analytical Department of Sinara IB.
What to expect next?
Most analysts believe that the ruble will strengthen a little more towards the end of the year. The tax period should work. Exporters will have to sell dollars to get rubles and give part of the money to the state.
– I believe that the currency rally is still close to its end at this stage, and the upcoming tax payments will equalize the balance in the market before the end of the year, – says Yuriy Kravchenko.
– A tax period is ahead of us, so the growth of the dollar and the euro may slow down this week. But the medium-term trend for the growth of the dollar seems to be formed, – analysts of the InvestFuture portal believe.
Most likely, next year the ruble will gradually weaken. With a budget deficit and a relatively weak economy, this is inevitable. Another thing is that it is unlikely that the fall of the national currency will be sharp and landslide. The financial authorities have already learned how to smooth out fluctuations using market methods. And the sharp rises of the dollar and the euro on the stock exchange usually end with the same sharp strengthening of the ruble. It doesn’t make much sense to pay attention to them, it’s better to be pragmatic – buy currency when you need it, and not when it seems to you that you can speculate on it.