The dispute over the abolition of the mandatory sale of foreign currency earnings: should we expect a collapse of the ruble

On October 11, 2023, Russian President Vladimir Putin signed a decree on the sale of foreign currency earnings by exporters until April 30, 2024. After this, the dollar exchange rate, which broke through the mark of 101 rubles per unit of American currency, began to decline and at the end of the year stabilized in the corridor of 90-91.5 rubles per dollar. However, the Bank of Russia claims that the impact of this measure on the foreign exchange market was moderate compared to the ongoing monetary policy and the level of the key rate, and the stabilization of the trade balance played a large role in the depreciation of the national currency. “A significant contribution was also made by the growth (compared to the lows of mid-summer 2023) in export value volumes, which affect the foreign exchange market with lags associated with the timing of foreign trade settlements,” the Bank of Russia noted. As a result, the Central Bank of the Russian Federation does not see “weighty reasons” for extending the mandatory sale of foreign currency earnings by the largest exporters after the end of the presidential decree.

However, the Cabinet of Ministers has a different opinion. Back in January, the government positively assessed the effectiveness of the requirement introduced by presidential decree and announced that it would advise on the extension of this measure. At the end of February, the position was confirmed by First Deputy Prime Minister of the Russian Federation Andrei Belousov after a meeting with representatives of the Russian Union of Industrialists and Entrepreneurs, exporting companies and various departments. According to him, the mechanism for the mandatory sale of foreign currency earnings has shown its effectiveness.

Who is right in the dispute between the “powers that be,” and what will happen to the ruble if this measure is canceled or extended in the near future? MK addressed these questions to financial analysts.

– Who is right in the dispute about the meaning of mandatory foreign currency revenue – the Central Bank of the Russian Federation or the government?

Mikhail Vasiliev, chief analyst at Sovcombank: “The introduction of the mandatory sale of foreign currency earnings played an important role in stabilizing the ruble exchange rate. The weakening trend of the ruble reversed on October 12 and the ruble began to steadily strengthen on the day when this measure was announced. Since October 11, the dollar has weakened against the ruble by 9%, from 100 to 91 rubles per dollar.

The volume of currency sales by Russian exporters on the domestic market has increased since October: according to the Central Bank, from April to September 2023, exporters sold currencies for an average of $7.3 billion per month; in October, currency sales volumes increased to $12.5 billion, in November – $13 .9 billion, in December – $14.8 billion, in January – $12.9 billion.

The ruble was further supported by an improvement in the trade balance and an increase in the key rate from 7.5% to 16%. Tight monetary policy slows down lending and reduces demand for imports (and therefore demand for currency). In addition, the current high rates on ruble deposits of 14-16% per annum support the attractiveness of savings in rubles.”

Vladislav Antonov, financial analyst at BitRiver: “Both the Central Bank of the Russian Federation and Deputy Prime Minister Belousov are partially right. Measures to sell foreign currency earnings did have some stabilizing effect on the ruble exchange rate, but the main factor is still the trade balance and oil prices. The head of the Central Bank, Elvira Nabiullina, said that there are other effective measures to stabilize the ruble exchange rate. She also assured that the abolition of the mandatory sale of foreign currency earnings will not have a strong impact on the exchange rate of the ruble against foreign currencies.”

Arthur Meinhard, Head of Analytical Department for Global IC Markets at Fontvielle: “Since the beginning of the implementation of the presidential decree on the mandatory sale of foreign currency earnings by exporters, the Russian currency has sharply begun to strengthen. True, it did not last long, just under a month, but during the period from October 11 to November 6, 2023, the ruble strengthened its position against the dollar by 8.4%, against the euro by 7.6%, and against the yuan by 8.3%. Of course, it would be wrong to say that this is the effect only of the introduced decree, but I believe that the strengthening of the Russian currency during this period was mainly due to the action of this document.

However, the effect of this decree was still quite limited and did not lead to a double-digit strengthening of the Russian currency. I attribute this to the fact that in the structure of foreign exchange earnings of exporters, foreign currency is being replaced by Russian currency, which is used in settlements with the country’s trading partners. Since the possibilities of using the ruble are limited, our exporters began to pay more in Russian currency. Vladimir Putin, in an interview with Carlson Tucker, said that until 2022, 80% of payments were in dollars and euros, and now only 13%, despite the fact that payments in yuan and rubles account for 68% of transactions (in approximately equal proportions).” .

– What will happen to the ruble if the government cancels the mandatory sale of foreign currency earnings?

Natalya Milchakova, leading analyst at Freedom Finance Global: “If the government suddenly cancels the mandatory sale of foreign currency earnings in March, the dollar will immediately go into the 95-100 ruble corridor, the euro into the 105-110 ruble corridor, the yuan will rise in price to at least 13-13.5 rubles. Not only the cancellation factor itself will work, but also the suddenness factor of such a decision, because initially the mandatory sale of foreign currency earnings by exporters was planned to be maintained until April 30. However, March 2024 is the month of the presidential election. Before the elections, a collapse of the ruble would be very inopportune. Immediately after the elections, it would also be somehow wrong to make a decision that is obviously unpopular with the population. And it is unclear who exactly will accept it, since the current composition of the Russian government will legally resign after the elections, and a new government will be formed after the elections, as is usually the case, for at least a month. So, if everything goes according to plan in March, and this restrictive measure for exporters continues, the ruble will tend to strengthen rather than fall. Through foreign trade operations, inflation is “exported” to other countries. Russia will not be an exception; the share of imports in our market is still high. We expect that in March the dollar will fluctuate in the range of 89-93 rubles, the euro in the range of 97-102 rubles, and the yuan in the range of 11.9-12.9 rubles.

Vladislav Antonov: “If the mandatory sale of foreign currency earnings is canceled in March, this could lead to some weakening of the ruble due to a decrease in the supply of foreign currency on the market. However, the effect will be moderate and depend on the dynamics of oil prices and import-export flows. For the dollar, the key resistance level is at 93.35 rubles. As long as the price is trading below it, the ruble is not in danger.”

– What will happen to the ruble if the government continues the mandatory sale of foreign currency earnings?

Mikhail Vasiliev: “We believe that this measure will be extended after April 30, but the sales parameters (80% and 90%) may be relaxed, and exporters will sell smaller volumes of currency than now. In general, this measure allows the government to maintain a stable exchange rate of the ruble and prevent its excessive weakening or over-strengthening. In turn, a stable ruble exchange rate makes it possible to contain inflation and balance the interests of exporters, importers, businesses and citizens. In the first quarter, we expect the ruble to have the strongest exchange rate against the euro and other currencies. The first four months of the year are usually favorable for the ruble due to seasonally low demand for the currency.”

Vladislav Antonov: “If the mandatory sale of foreign currency continues, this will support the ruble, helping to increase the supply of foreign currency. The ruble has a chance to strengthen, especially with rising oil prices, and the exchange rates of the dollar, euro and yuan against the ruble may decline. However, the effect will not be very large and will still depend on external factors.

In the week from March 4 to March 8, the ruble may continue to strengthen if current trends continue. First you need to pass the level of 90.50 rubles per dollar. After it, the road opens to 89 rubles per unit of American currency. As soon as Brent passes the level of $84 per barrel, the ruble will strengthen. For the euro, the nearest target is 97.20 rubles. Then it will be possible to shift it by 95 rubles per unit of European currency. For the yuan, the target is 12.45 rubles.”

Arthur Meinhard: “If this decree is canceled, we should expect a weakening of the ruble within 10%. However, in this case, the Russian currency will leave the 90-95 corridor against the dollar, which is quite comfortable by many criteria. Therefore, I think that the document will be extended. Perhaps amendments will be made to it regarding specific companies, but since the text of the decree has not been made public, it is not a fact that we will know about them. I would say that the strict monetary policy of the Central Bank and the action of this decree complement each other at the moment, and the full effect of the high key rate should be felt in the summer, so I expect the decree on the mandatory sale of foreign currency earnings to be extended for at least another 3 months. If it is maintained in its current configuration, then at the moment the markets may react positively, that is, by strengthening the ruble, but fundamentally nothing much will change.”