Bank not to increase interest rates to protect the ruble

At the end of January 2014 the Russian ruble has weakened 6.7% against the US dollar. However, the current ruble weakening is not large-scale. 


In 1998 Russia saw a 4-fold devaluation of the national currency, and in 2008-2009 the ruble saw a 40% devaluation. Additionally, it should be noted that the ruble has proved most stable over the last 1.5 years against the currencies of other developing countries, namely Brazil, Argentina, South Africa, India, Turkey. 

However, the current weakening of the ruble will have no significant positive effects on the economic growth in Russia, like it did in 1998 and 2009, because the causes are more of a fundamental nature. A weaker ruble will allow domestic manufacturers to quickly increase their output because of adverse situation in the global markets and lack of growth in household incomes. 

Furthermore, there is no point to count on strengthening competitiveness of domestic products in terms of price, because it is not the price but the demand for Russian goods in the global markets that matters. 

The Russian budget might benefit from the devaluation of the national currency, because a part of taxes, especially export duty and mineral extraction tax, is linked to the dollar value of prices of raw materials, and changes to the ruble exchange rate increase revenues from these taxes. There is, however, a major risk, because this will increase budget expenditures on social needs too.

Given the factor of devaluation of the ruble, inflation might reach 5.5% at the year end. According to the estimates made by Gaidar Institute, a 10% devaluation of the ruble might have an effect of adding extra 0.2–0.4 p.p. in favor of the inflation level at the year end. However, this might happen, provided that the ruble exchange rate sees no backward correction, which is quite possible. 

It is unlikely that the Central Bank of Russia increase interest rates to protect the ruble.  Normally, central banks in developing countries respond with higher interest rates to large-scale devaluation of the national currency. Today, the central banks in Brazil, India, Turkey have much higher interest rates than in Russia. Technically, the Bank of Russia might raise interest rates as well, however I don’t think it will do so, because it will definitely have an adverse effect on the economic growth which is already weak.  

Drobyshevsky S. M., Doctor of Economics, Director of Scientific Research