Since the beginning of the year, the Russian ruble has lost 16% of its value against the dollar and 13% against the euro. During this week, it traded at levels of around 83 rubles per euro and 91 rubles per dollar. That makes it the third-worst performing global currency so far this year, behind the Egyptian pound and the Argentine peso.
After Russian troops invaded Ukraine in February 2022, Russia’s currency immediately fell to a level of 113 rubles to the dollar. But the Russian Central Bank and the Ministry of Finance pumped money into the market and in July managed to bring the exchange rate back to 50 rubles to the dollar. At the end of last year, the West imposed a ceiling on Russian oil prices. Since then, the currency of the world’s second largest oil exporter after Saudi Arabia has been depreciating. So what happens next?
Why did this happen?
According to Russian officials, the depreciation of the ruble in recent weeks is due to higher imports and increased outflow of foreign capital. Observers note that in January alone, tax revenues in Russia fell by 35%. According to them, this will change towards the end of the Russian financial year, when major exporters exchange foreign currency for rubles to meet their obligations to the state budget, that is, to pay their taxes. Then the Russian currency should return to the range of around 75-80 rubles to the dollar, says Banki.ru chief analyst Bohdan Zvarich. According to Albrecht Rothacher, who has worked for the European Commission for 30 years, the decisive factor is that Urals crude oil was sold cheaply – for $49 a barrel in January.
What role does energy play?
Russia’s 2023 budget relies on an average annual oil price of $70 per barrel. The EU-imposed $60-a-barrel price cap is costing the Kremlin more than $170 million a day, according to the Finnish think tank Center for Energy and Clean Air Research. Brent crude was trading at around $85 a barrel this week. Another factor has to do with President Vladimir Putin’s approval of a deal that allows British energy giant Shell to sell its stake in the Sakhalin-2 oil pipeline project in the Russian Far East. The agreement allows Shell to transfer abroad revenues of 94 billion rubles (1.1 billion euros) from the sale of the oil pipeline project. Novatek, Russia’s second largest natural gas producer, will acquire this stake.
Withdrawal of capital
A number of foreign companies withdrew from Russia after the Russian invasion of Ukraine. Bloomberg Economics estimates that foreign companies that left Russia last year sold assets worth between $15 billion and $20 billion. “The reasons for the devaluation of the Russian currency lie in the shrinking export of oil and gas and the possible further withdrawal of capital from the country,” Elina Rybakova from the PIIE think tank told DW.
Another factor is liquidity in dollar and ruble transactions, says Eric Hontz of CIPE, a think tank affiliated with the US Chamber of Commerce. Their volume has fallen from over $3 billion a day before the war to about $1 billion a day now. Along with this, the costs of importing Western high technologies through third countries such as Turkey, Kazakhstan, China and Serbia are also growing, recalls Rotacher. “Sanctions have a stronger effect, especially the EU embargo on purchases of Russian oil and oil products,” says Rybakova. Others, however, argue that the ruble’s weakness is not an immediate effect of Western sanctions. According to them, it is more a sign of the long-term damage that the expensive war is doing to the Russian economy. This includes its growing dependence on China.
What is the role of the Chinese yuan?
“China uses Russia as a new raw material colony, on which it imposes lower raw material prices,” Rotacher told DV. In January, Russia began selling its growing reserves of the Chinese currency to plug a budget deficit caused by declining oil and gas revenues and heavy war spending. In 2022, Russia had a budget deficit of 3.3 trillion rubles, or about 2.3% of GDP. “There is a reorientation towards the yuan, which already accounts for more than 30% of transactions on the local foreign exchange market. For comparison: before the Russian invasion of Ukraine, its share was less than 1%. But the yuan is not a fully convertible currency and does not is as liquid as the dollar and the euro, so the transition to the yuan is still slow,” says Elina Rybakova from the PIIE think tank.
What are the predictions?
“It is very likely that the downward trend of the ruble will end,” Alexey Antonov from Alor Broker told DV. “We expect a gradual strengthening of the Russian currency.” Expert: Catastrophic collapse of the Russian economy However, many believe that the Russian government prefers a gradual weakening of the ruble, as this would increase budget revenues without causing higher inflation.
“The depreciated Russian currency helps to increase the ruble value of oil revenues in the budget, thereby mitigating the increase in the deficit,” financial analyst Tim Ash explains to DV. “The ruble may continue to depreciate if no interventions follow, with the prospect of reaching levels of 84.5-86.5 rubles per dollar in the next few weeks”, believes the chief economist of “Rus Invest” Alexander Harutunyan.
The optimistic version
The more optimistic forecasts are for the consolidation of the ruble around 78-83 rubles against the dollar. “We believe that the dramatic strengthening of the dollar against the ruble is coming to an end,” Alexey Antonov, head of the investment-consulting company Alor Broker, told DV. “Perhaps in the fall of this year, we will see oil above $100 a barrel – amid reduced production in OPEC and the onset of hurricane season in the US,” he says.
Author: Joe Harper
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Assessment 3.7 from 6 voice.
