Debates: Top economists weigh in on the implications of the strengthening of the Russian currency for the nation’s economy and speculate about possible future scenarios for the ruble in 2015.


The overall picture for the ruble looks much better than it did several months ago, experts say. Source: DPA / Vostock Photo

In early spring, the Russian ruble started strengthening significantly regardless of the gloomy forecasts about Russia’s economy, the current recession, the unfavorable geopolitical situation and relatively low and unstable oil prices. The ruble retraced its positions and has actually gained 22 percent this year against the dollar. Compare that to 2014, when the currency plummeted about 48 percent. The bad news, however, is that inflation is still running in double digits - almost 17 percent in March, which is a 13-year high.

Meanwhile, in early April, the exchange rates for the dollar and the euro decreased by almost 22 and about 28 rubles, respectively, since January, when they topped out at more than 71 and 81 rubles. On April 17, the exchange rates for the dollar and the euro plunged below 50 and 53 rubles, respectively. Nevertheless, such a trend can be dangerous, because such abnormal volatility may be driven by speculators, according to some experts

Russia Direct interviewed experts and economists to figure out if the ruble’s strengthening is sustainable. Is it a good sign or a bad harbinger for Russia’s economy? What are the reasons for such trading volatility and who is behind it: speculators, foreign investors or the authorities? 

Christopher Hartwell, president of CASE (Center for Social and Economic Research) in Poland

The ruble’s rebound is due to the same reasons why it collapsed in December. The price of oil has stabilized somewhat and there is a tenuous cease-fire in Eastern Ukraine. There is no longer a sense of panic in Russia that things are going to go very far south very quickly.

The Central Bank of Russia also has some credit in this, given the moves made in crisis mode. Of course, this creeping appreciation of the ruble is also very tenuous – if Russia were to escalate tomorrow in Ukraine, then the ruble’s appreciation would be swiftly reversed. Similarly, if the Russian corporate or quasi-corporate sector has another deadline for foreign debt coming due (as happened in December), we can expect to see pessimism takes over again. If anything, we’re not seeing a reversal of the ruble’s fortune, just a cease-fire.

The negative implications for the ruble’s appreciation are basically non-existent. Russia is far too dependent upon foreign inputs for its industry in the short-run to get the full benefit of ruble devaluation for exports, and this appreciation actually can help importers of inputs. Given that this re-appreciation has happened so quickly, there also is little chance of a big devaluation export bump. Right now, basically expectations are attempting to form, but market participants are wary either way.

I don’t see any real drawbacks from the appreciation of the ruble.

Will the ruble strengthen further in the future? No one really knows, but one thing is for certain, this, like economic growth, is something that is very much in the Kremlin’s hands. Respecting Ukraine’s territorial integrity and working on fixing the structural issues in the country will contribute to the stability and even appreciation of the ruble.

Any moves to continue to destabilize Ukraine will rebound directly to the health of the ruble. This is the truth of expectations – the exchange rate will move in a more volatile manner than may be justified by price differences, and this happens in a wilder manner when the situation is more volatile.

Oleg Buklemishev, associate professor in the department of economics at Lomonosov Moscow State University (MGU)

The ruble is strengthening, largely, because three major risks, which were presented in the assessments in the beginning of this year, have not been so far implemented.

First, many expressed their concerns about the exacerbation of the Ukrainian conflict, but it turned out to have been frozen and, thus, the toughening of the sanctions is not expected in the near future. Second, the oil price drop has been stopped and now we can see a slight bounce back. Third, the Government didn’t make abrupt moves in its economic policy, while the Central Bank got the situation at the currency and money market under control.

So, the classical overshooting of the exchange rate took place and now it is adjusting [to the current situation]. So far, there is no particular danger in the strengthening of the ruble at today’s rate. The other question is that the excessive fluctuation of the exchange rate in the opposite direction might be the ground for a speculative attack on the ruble in the future

From my point of view, the further strengthening of the ruble is unlikely. What is more likely is the currency reverse movement, which is related either to the implementation of one of the three mentioned risks, which, strictly speaking, still exist, or to the speculative game that will change the direction [in which the ruble will move].

One could remember that one of technical factors of the strengthening of the ruble can be the hard currency refinancing provided by the Central Bank and has been lately used by banks to boost the rate of the national currency. The stopping of this program or the probable infusion of additional rubles into the weakening economy will lead to the sudden change of the trend.

Stanislav Tkachenko, Ph.D. in Economics, professor at St. Petersburg State University.

There are a number of factors affecting the ruble’s growth. The first is fundamental – sanctions did not destroy the Russian financial and economic system. Our economy suffered from a capital outflow and the slowdown of investment into the real sector. Yet, our economy could successfully neutralize Washington’s attempts to cut Russian financial institutions from their contacts abroad and damage our energy and military-industrial sectors.

Other factors, the effects of which should not be underestimated, relate to the growth of oil prices and the end of the “shale revolution,” to high interest rates in Russia that attracted foreign financial speculators as well as to the easing situation in Ukraine and Russia’s ability to distance itself from it.

The strengthening of the ruble is not dangerous given that it stops at a balanced level, which I think is around 50-55 rubles per U.S. dollar. The strengthening of the ruble exchange rate will help to lower the inflation (imports will no longer be overpriced) and ease the foreign debt burdens of Russian companies.

In addition, such an exchange rate leaves room for potential opportunities for import-substitution in the industrial and agricultural sectors as well as for refilling the state budget with revenues from exports of raw materials and energy resources. If the strengthening of the Russian currency continues, the country will return to the “Dutch disease” characterized by a boost in the number of imports and the degradation of industry and some agricultural sectors.

The ruble is under the total control of the Central Bank of Russia following almost six months of turbulence in world currency markets, so only there we can get a definite answer. My forecast is that the ruble will not strengthen further. A bounce back to 55 rubles for dollar is more possible. The large amplitude of fluctuations is usual for the ruble, but with time, it will decrease and we will get back to the stable rate. This is only possible if a real currency war between U.S. dollar and euro will not expand, the signs of which is already evident.

In this situation, the Central Bank of Russia will have to work on a new strategy that is most likely to be oriented towards the gradual growth of the ruble’s exchange rate. This, in turn, is aimed to decrease the costs of urgently needed technological transformation of Russian industry.

Birgit Hansl, program leader and lead economist for the Russian Federation, Europe and Central Asia at the World Bank

The recent ruble movements are very welcome and coincide with the global oil price movements, which remain key for Russia. As oil prices stabilized the ruble is also becoming less volatile. It would be too early to read into this much more than that. Yes, the ruble has appreciated over 4 percent in 2015, making it the strongest performer in a basket of 24 emerging market currencies tracked by Bloomberg, yet it is still a long way to make up for the 46 percent the ruble lost in value against the U.S. Dollar during 2014. The stable oil price is more importantly leading to a slowly retreating risk perception: both the Russian credit default swap (CDS) spread and the Russian Emerging Markets Bond Index Global (EMBIG) spread dropped significantly, which is indeed good news for investors and the economy.

Yakov Mirkin, head of the Department of International Capital Markets at the Russian Academy of Sciences’ Institute of World Economy and International Relations

Is the ruble rebound long lasting? Nobody knows, because we don’t exactly understand what is going on. What are the scenarios for the future of the ruble?

The first scenario is that the ruble’s growth is a result of the government’s policy, which is aimed at strengthening the ruble before the 70th anniversary of the Great Victory [over Hitler’s Germany during World War Two]. After all, it is possible to strengthen the ruble artificially and stabilize it for a certain period of time. If this is the case, it can last for months, but afterwards it will explode and [spin out of control].      

The second scenario is leaping forward and leaping backward. The ruble in this case is like a small ball that is bouncing on a downward-sloping asphalt path. Up and down, up and down. But, again, it is a downward movement. It happens frequently in financial markets. The deeper the plunge, the higher is the bounce-back. If so, in April, we might see a new ruble dumping and a new weakening.

The third scenario is a speculative bubble. The ruble’s rebound is a result of a speculative game for strengthening the Russian national currency. It also could stem from so-called “carry trade” deals. In this case, the ruble resembles an artificially inflated soap bubble. Such tricks have never been long-term.

What is the general background? We have a weakening economy under pressure from foreign sanctions, a strong dollar and low prices on oil, gas and metals. And this economy is losing its core partner: the European Union. In addition, there is no strong and adequate response to the current economic challenges.

The general trajectory of the ruble is weakening no matter how high it may rebound. The ruble is like a hot-air balloon in the sky, taken and tossed by air currents. The team on board the balloon is not ideal, but this team is struggling to wrest the balloon down to the ground. But the power of the air currents is so strong, that it is going up in the air, higher and higher. And this is a long-tern trend. If the authorities find good responses to the challenges, they will be able to control this uncontrollable flight.

The opinion of Yakov Mirkin is based on the post on his Facebook page. You can find the original version here

UPDATE: The article was updated on April 19, 2015 to include a commentary by Birgit Hansl, program leader and lead economist for the Russian Federation, Europe and Central Asia at the World Bank.