The ruble exchange rate prevents companies from reducing costs and increasing investments

Central Bank polls and other market research show a new increase in costs and investment intentions of Russian companies. Polls by the Gaidar Institute show that in order to reduce the former and sell the latter, enterprises need a strong ruble. Despite the downward revision of expectations for the price of Urals oil, the macroeconomic consensus forecast of the Central Bank fixes expectations of the strengthening of the ruble – but only until the end of the year.

Like other market indicators of the state of affairs in the industry, the Gaidar Institute (IEP) survey leading indicators in May 2023 continued to indicate a historically high level of business activity and expectations in the sector. Their slight cooling in April was replaced by a de facto stabilization in May (see Kommersant of June 1). At the same time, according to surveys by IEP and Rosstat, among all restrictions, “uncertainty of the current economic situation and its prospects” retains the strongest negative impact on industrial growth, although by the second quarter of 2023 the negative impact of this factor has decreased to 43% of mentions (after a local maximum in 63% in July 2022, see graph). During the period of the “COVID crisis”, the frequency of his mentions was higher – 72%. “It seems that the largest military conflict since the Great Patriotic War turned out to be more understandable to industry than a pandemic,” says Sergey Tsukhlo, author of the study. The restraining effect of domestic demand (the second most influential factor) was and remains modest due to the unprecedented import substitution, he believes.

The next in the rating of industrial growth restrictions were the weakness of external demand and “a weak ruble and an increase in the cost of imported equipment and raw materials.” If in October 2022 the latter restrained the growth of output, according to 6%, then in April 2023 it was already 30% of companies. A detailed study of the IEP on the exchange rate needed by enterprises (regularly conducted since 2015) in April 2023 indicates that the industry traditionally places the greatest demand for the strengthening of the ruble in connection with the cost of production – this is indicated by 71% of enterprises. Further weakening of the exchange rate will force only 5% of companies to switch to cheaper components and raw materials, and only 8% say that costs are independent of the ruble exchange rate.

The second-largest demand for a strong ruble creates investment activity among enterprises — it will stimulate the growth of purchases of machinery and equipment from 60% of domestic factories, and only 4% of manufacturers link the growth of capital investments with the weakening of the ruble. The majority (54%) of enterprises also associate the growth of domestic demand with the strengthening of the ruble exchange rate. Only 13% of respondents share the traditional views (weakening of the currency – rejection of rising imports – growth of domestic demand). “The explanation for the unconventional view on the relationship between the national currency rate and domestic demand,” according to Mr. Tsukhlo, is that the strengthening of the ruble means a reduction in the cost of imported components, for which there is either no replacement in the Russian Federation, or it will reduce the competitiveness of domestic products.

Analysts surveyed by the Central Bank expected in May that in 2023 Urals oil would cost $56 per barrel on average per year ($60 in the April survey), in 2024 – $60 per barrel ($64) and would remain at this level in 2025 ($62). Against this background, the consensus still assumes a smooth weakening of the ruble in the medium term – 76.9 rubles. for $1 on average in 2023, 77.9 rubles. in 2024 and 79.5 rubles. in 2025. “To achieve an average annual rate of 76.9 rubles. in the rest of the year, the average exchange rate should be equal to 77.5 against the current order of 80.8 rubles. per dollar,” the authors of the Solid Numbers Telegram channel note.

Artem Chugunov