The Ministry of Finance is going to weaken the ruble by the yuan

The agency decided to resume the purchase of foreign currency

The Ministry of Finance may resume purchases of foreign currency for oil and gas super profits in September. So far, the authorities plan to buy only Chinese yuan in a test mode. This will happen as soon as the concept of a new fiscal rule is approved. The mechanism can be agreed even before the draft budget is submitted to the State Duma, that is, before October 1.

The issue of approving the proposed concept is brought to the level of the President. How effective this strategy is, given that the yuan is managed directly by the People’s Bank of China and can be devalued at any time, is an open question. But, as MK found out, the return to the budget rule itself causes heated debate among experts.

A fiscal rule is a safety mechanism originally created to protect the state treasury from fluctuations in oil prices in foreign markets. He had several editions. The one that was in effect until February 2022 assumed that all Russian oil revenues above $44.2 per barrel (this “cut-off price” was indexed annually) went to the National Welfare Fund (NWF). And if prices fell below the specified level, then the currency would be sold from this fund and thus the country’s budget would be replenished. The budget rule was temporarily suspended from the end of February due to the blocking of half of the funds of the NWF abroad after the start of a special operation in Ukraine.

A few months ago, talk began about a possible resumption of the fiscal rule, but with a different formula. So, in July, the Ministry of Finance proposed to focus on the cut-off price of $60 per barrel when calculating basic oil and gas revenues with an oil production volume of 9.5 million barrels per day, and to buy the currencies of friendly countries for excess profits. And now comes the news that the purchase of foreign currency in the National Welfare Fund may resume immediately after the approval of the new concept – even before agreeing on the budget for next year.

“They are returning to the fiscal rule for two reasons,” explains Natalya Milchakova, lead analyst at Freedom Finance Global. – The first is the need to replenish the NWF, since oil prices remain significantly higher than what is included in the budget. The second reason is that without a budget rule and while maintaining a number of currency restrictions, the ruble exchange rate has greatly strengthened, and this is unprofitable for exporters and, ultimately, for the state.” Therefore, dollars, euros and other world reserve currencies, in which the funds of the NWF used to be invested, need to be replaced with something. But it turns out that the only world reserve currency that is not toxic for Russia is the yuan, and from this point of view, there is no alternative to the Chinese currency.

At the same time, investing in the yuan has its own geopolitical risks. In addition, the authorities of the yuan may suddenly devalue if the economic situation in China deteriorates. This will lead to the depreciation of funds invested in the NWF, the expert warns. “The depreciation of the ruble increases the ruble income of exporters, the budget, the country as a whole,” Mark Goykhman, chief analyst at TeleTrade, explains the actions of the Ministry of Finance. “And in July 2022, for the first time in many months, there was a budget deficit: revenues became less than expenses by 892 billion rubles.” In the future, such a deficit may increase, and the possibility of covering it with external loans is limited by sanctions. Therefore, it becomes extremely important to increase income due to the weakening of the ruble and the growth of exchange rates against it. And this can be achieved by buying foreign currency, including the yuan, the analyst said.

At the same time, a number of experts believe that the budget rule should be abandoned altogether. As pointed out by the head of the Department of World Financial Markets and Fintech of the Russian University of Economics. GV Plekhanov Denis Perepelitsa, the budget rule, whose ideologist was the former Minister of Finance Alexei Kudrin, was created to mitigate the shocks of the open Russian economy from global crisis phenomena. But under the conditions of sanctions and actual de-dollarization, the situation requires the development of the domestic market, and it would be more expedient to direct free foreign exchange earnings to investment projects within the country (purchase of foreign equipment, attract foreign specialists, etc.) And investments in yuan, or rather government bonds, denominated in yuan, essentially repeat the policy of previous years, simply reducing the risks of blocking assets in dollars.

“Instead of investing in our economy, providing jobs in times of crisis and creating infrastructure projects for centuries to come, our government is trying to figure out which country to send money to,” says Georgy Safonov, Deputy General Director of the European Consulting Group . Since the President’s Munich speech, gold reserves have been kept in the banks of potential opponents, and the proposed scenario for investing in yuan is a little better, the expert is sure.