The Risks of Ruble Depreciation Remain Quite High

On 14 March, the head of Russian Ministry of Economic Development, Maksim Oreshkin, stated that the ruble exchange rate exceeds the fundamental values corresponding to the balance of payments of the Russian Federation, which contributes to the consumer price dynamics being slower than expected.

Mind that the Russian Ministry of Economic Development’s basic forecast on the US dollar average annual rate is 67.5 rubles, but since the beginning of this year, it was 59.0 rubles on average, deviating from the predicted values by an average of 12.6% and reaching a one-and-a-half year minimum of 56.55 rubles in mid-February.

According to our preliminary estimates, the real effective ruble exchange rate, which during 2016 was near the fundamentally substantiated level determined by the dynamics of productivity, terms of trade, capital flows, and public expenditure, is currently overestimated by 4.5–5.5%. In this regard, the return of the real effective ruble exchange rate to the equilibrium trajectory, taking into account the inflation in Russia being at 4.6% (February 2017 to February 2016) and in trade partner countries at 1.5–2.5% on average, will require ruble depreciation by 7–9% in nominal terms. Note that the observed overvaluation of the ruble is mainly due to the increased interest in Russian financial assets on the part of non-residents as well as relatively stable high oil prices in January – early March this year ($55 per barrel on average).

Apparently, the ruble appreciation that is excessive relative to the fundamental level is indeed of a short-term nature, and the risks of its weakening in the medium term generally remain rather high. The reason for this is a possible decline in oil prices due to the persisting imbalance in its supply and demand in the global market, which can be exacerbated by a slowdown in China’s economic growth as well as tightening of the US Federal Reserve System’s monetary policy, which will increase the attractiveness of US assets and cause capital outflow from other developed and emerging markets, including Russia.

Alexandra Bozhechkova – Head of the Monetary Policy Department