The fate of the national currency after the presidential election became known

“Sanctions are like boa constrictors”

— How, in principle, can you evaluate the exchange rate of our ruble recently?

— It depends on what period you take into account. Let’s say, in 2023, the ruble devalued against the dollar by “only” 21.6%, which is undoubtedly quite a decent result in comparison with the Turkish lira, which fell by 36.6%, or the Nigerian naira, which fell in price 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. Unflattering benchmarks are convenient, but for the domestic currency more worthy examples for comparison are 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 “red line” 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 after February 23, the ruble on the Moscow Exchange with settlements “today” even broke through the level of 100 rubles per dollar, 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—sanctions against the Moscow Exchange and the National Clearing Center (NCC)—turned out to be unrealized.

“And yet, if the sanctions were not in effect, they would not have been applied.

— Of course, one should not underestimate the effectiveness of sanctions. They, like boas, strangle their prey slowly but surely, tightening the victim’s body with rings of numerous “packages”. In general, sanctions undoubtedly lead to a 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 weaken the outflow of capital from Russia, which contributes to the strengthening of 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. This is true?

— 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 scissor effect reduced the flow 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, primarily due to our “turn to the East” and the expansion of “parallel imports”.

“Shocks will come”

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

— It 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 thereby 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 in the country 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.

— Recently, the exchange rate of the national currency has been actively influenced by reports from border areas. Thus, the weakening of the ruble on the eve of the elections, on March 13 and 14, was influenced by drone attacks on Russian oil refineries. But they were clearly not the last. Is this a significant factor for the national currency?

— While these attacks are having an impact on the Russian oil products market, the impact of these attacks on the ruble is subtle. We’ll watch.

— Last week there was another interesting news. The Central Bank of the Russian Federation revised the estimate of the country’s trade surplus in January 2024 from $9.7 billion to $7.8 billion due to a decrease in exports and an increase in imports. The regulator often indicates that it is the trade balance that affects the ruble exchange rate. Will this have an impact?

— The balance change is significant, but these are data for January. They are already taken into account in the price of our national currency.

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

— The most likely scenario is 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.

“No Soros will break through”

— 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?

— Until the recent drone attacks on oil refineries, the expert consensus was “the rate will not be changed.” However, due to fires at refineries, prices for petroleum products began to rise. This process may in turn cause prices for other goods to rise. Accordingly, the likelihood is growing that the Central Bank will be forced to increase the rate, say, by one percentage point – from 16% to 17%. An increase in the key rate helps strengthen the national currency. If the regulator leaves the rate unchanged, the impact of this decision on the ruble can be neglected.

— Many experts 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 mandatory sale of foreign currency earnings 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 might 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 the mandatory sale of foreign currency earnings will be extended for reasons of maintaining stability.

— Another scenario that is being discussed with interest on social networks concerns the possibility of speculators attacking the stock exchange and deliberately lowering the ruble exchange rate after the elections in order to undermine confidence in the authorities. How realistic is this?

– Not strong enough. No Soros with an attack on the ruble will break through the sanctions “Iron Curtain”. And the internal Soros are afraid of the Kolyma climate.

— So what will the ruble exchange rate be after the elections?

— The best forecast is the market one. The price of a futures contract for the US dollar exchange rate paired with the Russian ruble with an execution date of March 21 is 91.98 rubles per dollar, and with an execution date of December 19, 2024 – 96.8 rubles per unit of American currency (data as of the end of the day on March 14) . But the market, of course, can also make mistakes.

— What can you recommend to Russians in terms of investing in foreign currency in such conditions?

— Take into account existing currency risks and diversify the currency basket. It is hardly worth giving up toxic currencies, primarily 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 there are restrictions on foreign currency deposits.