A fair exchange rate for the ruble has been named: greatly undervalued

Russian took first place in the ranking of the most undervalued currencies

A fair dollar exchange rate should be about 33 rubles. This is evidenced by the calculations of RIA Novosti analysts. The agency presented a rating of G20 countries based on the cost of a combo meal of a burger, fries and a glass of cola and then calculated the national currency exchange rate based on purchasing power relative to the US dollar. The result is disappointing: the Russian currency has become the most undervalued among the currencies of the G20 countries. Why the ruble is treated with such injustice and whether there is a chance for its strengthening, MK found out from experts.

According to the study, the top three most undervalued also included the Indonesian rupiah, whose exchange rate is 2.2 times undervalued against the US dollar, and the South African currency: its rand is 1.8 times cheaper than it should be. The agency’s calculations also revealed overvalued representatives of the foreign exchange market. Thus, the euro exchange rate is overvalued by 16%. It is followed by the Canadian dollar, which fetch 15% more than it is worth according to the Combo Lunch Index.

Let us recall that the Economist magazine came up with the idea of ​​comparing “unofficial” purchasing power parity (PPP) in different countries through a single product in 1986, which introduced the so-called “Big Mac index”. This idea was picked up by financial publications around the world, including Russian ones. However, in 2022, the manufacturer of Big Macs, the fast food chain McDonald’s, left our country due to sanctions and stopped selling this burger. However, a replacement was found for the famous index.

“One of the tools for the objective value of a currency is the PPP calculation, which boils down to how much money is needed in different countries to purchase a fixed set of goods,” explains the essence of the approach, Associate Professor of the Department of State and Municipal Finance of the Russian Economic University. Plekhanov Mary Valishvili, – The most popular method for calculation is the “Big Mac index”. In 2022, according to calculations of this index, the undervaluation of the Russian currency relative to the US dollar was 65.4%, that is, then the ruble should have been worth 26.79 rubles per dollar. A similar situation was observed in the previous two years.” The results of the study conducted by the Russian agency are quite comparable with data for previous periods, therefore, there is no doubt about the objectivity and reliability of the calculations, the scientist noted.

As Maxim Osadchiy, head of the analytical department of BKF Bank, pointed out, from April 2000 to January 2022, the Russian ruble was consistently among the most undervalued currencies according to the Big Mac Index. He has repeatedly been the leader of this anti-rating. After the start of the SVO, the English magazine The Economist excluded the ruble from the list, but alternative calculations now made show that the ruble continues to be a record undervalued currency. However, from the fact that it is significantly undervalued, it does not at all follow that it should be strengthened. The fact is that one of the main reasons for the undervaluation of the national currency is the low level of wages. The food products included in the calculation of the “Big Mac Index” and its analogues are “labor-intensive”: the main part of their cost is the wages of those who cook this burger in fast food restaurants, and Russian exports are formed mainly by capital-intensive industries. The second factor of the significant undervaluation of the national currency is associated with the low demand for the ruble on the international market. In addition, this situation also reflects the underinvestment of the Russian economy.

“This rating does not take into account all geopolitical and external risks, which are also included in the value of the national currency, as well as global demand for it, which will grow as foreign trade relations with other countries switch to settlements in national currencies,” believes an analyst at Freedom Finance Global Vladimir Chernov. The ruble is greatly undervalued, since its exchange rate now includes all external risks and sanctions on the export of Russian oil (price ceiling). If it weren’t for them, the dollar exchange rate would probably be around 70–75 rubles, the expert noted. However, a reversal towards strengthening should not be expected quickly. “Even if armed clashes stop tomorrow, all parties make peace and sanctions are lifted, no one will strengthen the national currency to 33 rubles per dollar – this is simply unprofitable for the budget,” says financial expert Alexey Krichevsky. Too many expenses are tied to export earnings, the analyst emphasized.