Analyst Osadchy gave a forecast for the ruble exchange rate after the presidential elections: strong shocks are dangerous

— How do you evaluate the results of the ruble over the past year?

— In 2023, the ruble devalued against the dollar by “only” 21.6%, which is undoubtedly a very good result compared to the Turkish lira, which devalued by 36.6%, or the Nigerian naira, which fell by 50.1%.

— And you can also remember the Argentine peso, which the authorities led by the new economist president devalued by half, and completely calm down. Your point is clear: it all depends on what we compare with. For the domestic currency, more worthy examples for comparison are still desirable. How have events developed on the Russian foreign exchange market in recent months?

— At the end of 2023, the ruble exchange rate took a defensive position at a relatively safe distance from the psychologically significant level of 100 rubles per dollar. So, on December 30, 89.7 rubles were given per unit of American currency. In January, the ruble even tried to go on the offensive, strengthening on January 16 to 87.7 rubles per dollar, but retreated under the blows of sanctions to “pre-prepared positions.” In anticipation of the American and European restrictions introduced on February 23-24, the ruble on the Moscow Exchange with “today” settlements even broke through the level of 100 rubles per dollar on February 22, but immediately bounced back, because the panic was clearly premature – the sanctions turned out to be quite toothless ” The main threat that most frightened the market—bans against the Moscow Exchange and against the National Clearing Center (NCC)—turned out to be unrealized.

— And, nevertheless, if the restrictions were not in effect, they would not have been applied.

— Of course, the effectiveness of sanctions should not be underestimated. They, like boas, strangle their prey slowly but surely, tightening the victim’s body with rings of numerous “packages”. In general, sanctions undoubtedly influence the weakening of the ruble, but over relatively short periods of time they can also have the opposite effect on the domestic currency, since they contribute to a decrease in both exports and imports. Sanctions also lead to a weakening of capital outflow from Russia, which works to strengthen the ruble.

— The Central Bank claims that the key influence on the dollar exchange rate is the state of the trade balance, and not administrative measures to limit the sale of foreign currency earnings by exporting companies.

— You can’t argue with the regulator. Russian net exports decreased almost threefold: from $315.6 billion in 2022 to $118.3 billion in 2023. At the same time, exports decreased and imports increased; this “scissors” effect reduced the influx of foreign currency into the Russian economy and contributed to the weakening of the ruble. Exports of Russian goods fell due to sanctions restrictions and low demand on the international market amid slowing global economic growth. And imports grew, first of all, thanks to the “turn to the East” and the expansion of “parallel imports”.

— The Russian economy is going through a period of structural restructuring, so changes in this part can be called partly expected.

— An important problem is the structural restructuring of the Russian foreign exchange market. Firstly, it was divided into “isolated compartments” for individual currency pairs, which has never happened before. Converting large volumes of one currency into another has become difficult. Secondly, these isolated segments of the foreign exchange market have become “shallow”: liquidity often becomes critically low, which is manifested in “breakouts”, when powerful exchange rate fluctuations occur with relatively small volumes of transactions, as was the case, for example, on February 22. The effect of a decrease in the liquidity of the foreign exchange market can be more clearly observed in the currency swap market (the so-called temporary exchange of assets during trading on the stock exchange – “MK”), the quotes of which reflect the often severe shortage of dollars and euros. In particular, market participants are often willing to borrow euros at double-digit, prohibitively high rates.

— What are the prospects for the ruble after the elections?

— The ruble is affected by multidirectional factors. I will list the main ones. First, the ongoing conflict between Israel and the Palestinians, intensified by the Houthis’ support for the Palestinians, is driving up the price of oil and thus contributing to the strengthening of the ruble. Secondly, the budget deficit will most likely be largely financed by the “printing press”, which will contribute to the weakening of the ruble. In 2023, the budget deficit amounted to 3.2 trillion rubles against the plan of 2.9 trillion rubles. In 2024, the budget deficit is planned at 1.6 trillion rubles. In 2022, the M2 money supply grew by 24.4%, in 2023 – by 19.4%. Active growth of the money supply is a factor in the weakening of the ruble. At the same time, the Central Bank’s strict monetary policy and, first of all, the high level of the key rate contribute to the strengthening of the ruble.

It is clear that with such a combination of multidirectional factors, it is not possible to reliably predict the dynamics of the ruble, especially in the turbulent conditions of a geopolitical conflict.

— Some market participants have formed expectations that before the elections they will keep the ruble from falling, and immediately after them it will go downhill. Do you believe in such a scenario?

— The most likely option for now seems to be a moderate weakening of the ruble, but shocks will undoubtedly come. Strong shocks, primarily sanctions, can collapse the ruble, as has happened more than once. Moreover, the ruble’s “immunity” to such shocks has weakened due to decreased liquidity of the Russian foreign exchange market.

— The Bank of Russia will make a decision on the key rate on March 22. What will it be like and how will it affect the ruble?

— It is highly likely that the regulator will leave the rate unchanged. Accordingly, the impact of this decision on the ruble can be neglected.

— On forums and on social networks, they also drew attention to the divergence of points of view between the government and the Bank of Russia regarding the impact of the presidential decree on the sale of foreign currency proceeds on the dollar exchange rate. The Central Bank of the Russian Federation claims that administrative measures are not key to determining the ruble exchange rate and insists on not extending this order after April 30, when the decree expires. And the government highly appreciates this restriction and intends to insist on its further preservation. How can its cancellation or extension affect the ruble exchange rate?

— Extension of the presidential decree on the sale of foreign currency earnings will be neutral for the ruble exchange rate. The cancellation of this measure will contribute to the weakening of the ruble. But I am inclined to believe that this measure will be extended for reasons of maintaining stability.

— What can you recommend to Russians in such conditions?

— Take into account existing currency risks and diversify the currency basket. It is hardly worth giving up “toxic” currencies, that is, dollars and euros, and it is hardly worth buying yuan. It should also be remembered that it is unwise to open deposits in foreign currency (both “toxic” and “non-toxic”) in Russian banks as long as restrictions on foreign currency deposits are in effect.