Devaluation of the ruble has a few destructive effects

The ruble has weakened substantially against the US dollar since the beginning of the year, overtaking the highest values since 2009 and a physiological value of Rb 35. The euro reached a new record of Rb 48 on Thursday.


Russia’s real sector and financial sector are not ready to such rates of devaluation of the ruble. I think that the Russian national currency weakening at such rates may have a few devastating effects. 


Indeed, the financial sector should expect inflation rate to increase in response to a free-floating exchange rate regime. The inflation targeting policy is not working now, because interest rates haven’ yet proved efficient to curb growth in prices, whereas devaluation is partially included both into inflation expectations and the price of goods: prices of imported goods tend to increase first, and domestic prices do the same thereafter. Gaidar Institute’s regular business surveys of managers of Russian enterprises show that merely 12% of the companies benefit from devaluation of the national currency. They would rather choose less expensive imported equipment than competitive advantages in terms of the price parameter – our goods are more competitive in dollar terms. It would, therefore, be unreasonable to think that a weak ruble can encourage growth in the domestic industry. 


Groups of those who will win and those who lose from the devaluation have been developed in the Russian economy. The federal budget, enterprises operating in the energy and fuel sector, some banks will find themselves among the winners, whereas the entire manufacturing industry is going to lose, especially the car industry which is already facing issues of slumping sales, because 90% of component parts are imported from Europe. I think, prices of cars assembled in Russia will eventually increase about 15%. Enterprises specializing in the assembly of household appliances and electronics are facing a similar threat. Eventually, such a devaluation will further slow down economic growth rates. 


Nevertheless, the inflationary effect of the devaluation will be weaker than that in 2008-2009, except that a forecast level of inflation might have extra percent to measure 6% instead of 5%. 


I anticipate strengthening of the ruble by the middle of 2014, because I think that devaluation is already redundant. Late in the year we may have an exchange rate of Rb 34.5-35 per US dollar. Additionally, the fact that devaluation is currently being mixed with speculative attack and adverse anticipations should be taken into account. For instance, banks’ statements show that daily purchase of foreign exchange have increased 4-fold against a relatively stable period. There is no point to buy dollars now, because it may be exposed to high risks or major losses. By the way, the Central Bank is most likely to withdraw the banking license of banks notoriously distinguished by speculations on devaluation and overestimating respective risks for their balance.


Vedev A. L., Director of the Center for Structural Research