Russians will still remember the times when the dollar cost 60 rubles, with nostalgia.
Photo: Mikhail FROLOV
A dollar at 60 was great. I think we will still remember these times with nostalgia. For most of the year, the ruble remained 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 big 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/barrel area. But it is almost impossible. World demand is declining. When countries do not have money to buy raw materials, prices inevitably fall. And it seems that even OPEC+ production cuts are unlikely to change the situation much. Yes, it will soften and slow down the fall, but no more.
And for Russia the situation is even worse. Our oil is sold at a great discount. For example, from November 15 to December 14, the average sales price for our Urals was $57.5 per barrel. And this despite the average price of Brent in the same period – $ 86 – 87. Our exporters have to get rid of a third of the cost. In addition, the Europeans introduced a maximum price.
– In general, the weakening of the ruble can be considered a continuation of the trend of the last few weeks and the result of a combination of several factors. Therefore, the Russian currency remains under pressure from the new sanctions and the fall in oil prices. At the same time, market participants cannot yet objectively assess the full effect of the introduction of a price ceiling for Russian oil, but they are likely to present an unfavorable scenario for the ruble in advance, in which a decrease in exports foreign exchange earnings are expected next year, – says Yuri Kravchenko, head of the analytical department banks and money market IC “Veles Capital”.
At the same time, public spending is on the rise. Largely due to defense and security spending. There will also be a deficit of several trillion rubles this year. 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 tax oil companies pay. So one of the ways to increase them is to reduce the ruble exchange rate. With an oil price of $100 a barrel, even a deep discount didn’t seem critical. There was enough money. Now the situation is no longer so rosy. Therefore, to meet budget obligations, a 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 has had an increasingly negative impact on the revenue of the state budget and exporters. In addition, in the last six months, oil and other raw materials have fallen significantly in price, significantly reducing export earnings entering the country compared to the maximum values of 2022, ”explains Dmitry Babin, an expert on the stock market. in BCS Mir Investments.
Reason 2. Deceleration of inflation
The cheap ruble has a negative factor: it causes an increase in prices. We have always had a large share of imported products. Now, of course, it has diminished, but not so much that its influence has been drastically 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, have even fallen. 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 large impact on the overall indicator. Furthermore, although import volumes are growing, they still do not reach last year’s values. And the Central Bank left the key rate unchanged, around 7.5% per year. This is quite high, which means it will stop further price increases.
Reason 3. Printing.
Explicitly, most countries no longer include the printing press. But indirectly from time to time they support their own economies. So the US and Europe have been actively printing money for the last 12-13 years, right after the 2008 crisis and during the pandemic. To do this, government bonds were issued. That is, they borrowed money from financial institutions or private investors. And the money received covered the deficits in their budgets. The Russian authorities have started to do something similar under 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 rate. 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.), – explain analysts from the InvestFuture portal.
For example, in November-December, the Central Bank placed almost 1.5 trillion rubles in banks (this is what is called REPO auctions). In calm 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. Import growth
If we don’t do very well in the export market. Volumes are shrinking. Gross income too. The situation is improving with imports. Companies are finding more and more alternative solutions. 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 more than $20 billion have entered the country under the parallel import scheme, the head of the Federal Customs Service, Vladimir Bulavin, said on Monday.
Reason 5. Investor behavior
The dollar exchange rate is determined by the relationship between supply and demand in the foreign exchange section of the Moscow Stock Exchange. There are no big financial institutions there now. Exporters and importers rule. At the same time, the participation 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 account abroad. SWIFT transfers are still possible through some of the major banks. And the cap is big: $1 million per month.
– The wave demand of the population for currency is another important factor influencing the ruble. This year, the population actively participates in operations on the foreign exchange market. In 10 months of 2022, Russians amassed more than $69 billion in foreign bank accounts, mostly in US dollars and euros. This year shows that the threat of sanctions, geopolitical risks and similar factors can trigger an increase in demand for foreign currency, says Sergey Konygin, Principal Economist in the Analytical Department at Sinara IB.
What to expect next?
Most analysts believe that the ruble will strengthen a bit 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 think that the rally of the currency is still close to its end at this stage, and the next tax payments will equalize the balance in the market before the end of the year, – says Yuriy Kravchenko.
– A tax period is coming up, 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, according to the analysts of the InvestFuture portal.
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 the fall of the national currency is unlikely to be sharp and sweeping. Financial authorities have already learned to smooth out fluctuations using market methods. And the strong rises of the dollar and the euro on the stock market usually end with the same strong strengthening of the ruble. There is not much point in paying attention to them, it is better to be pragmatic: buy currency when you need it, and not when you think you can speculate on it.