GAIDAR INSTITUTE EXPERTS ASSESS THE IMPACT OF THE RUBLE EXCHANGE RATE ON RUSSIA’S ECONOMY
In their commentary for the Nezavisimaya Gazeta, Sergey Tsukhlo, Head of the Business Surveys Department at the Gaidar Institute, and Sergey Zubov, senior researcher at the Institute’s Financial Studies Department, specified the ruble exchange rate that could be optimal for the Russian economy.
The current exchange rate at about RUB 56 per US dollar has turned out not to be “optimal” for the Russian economy, especially if the economy is understood primarily to be exporters and businesses oriented to foreign markets. The government, judging by the explanations offered by Russia’s First Deputy Prime Minister Andrey Belousov, believes that the national currency’s exchange rate should go down “as quickly as possible”, although it recognizes the existence of constraints imposed by inflation and domestic demand. To put it shortly, the government officials share the more or less consensus view that at present, the “optimal” exchange rate is within the range of RUB 70 to RUB 80 per US dollar. This means that Russians, one way or another, should prepare for the ruble’s depreciation by 25-40%.
“In a time of sanctions, only a strong ruble can promote an effective import substitution,” said Sergei Zubov.
Meanwhile, according to Sergei Tsukhlo, in the ranking of industrial growth constraints, the factor of a shortage of raw materials and components soared fr om 10th place in January 2022 to 3rd place as early as April. “In June 2022, according to preliminary data, 71% of enterprises have adequate stocks of Russian raw materials and components, while 36% of them have adequate stocks of imported ones. Insufficient stocks are reported by 18% and 50%, respectively,” he explained.
At the same time, quite recently, at the beginning of this year, the surveys of industrial enterprises conducted by the Gaidar Institute revealed the factor of a weakening ruble to be among the top 5 current industrial growth constraints.
A weak ruble was considered to be a constraint by 35% of enterprises (from year beginning until February 24, the average ruble-to-USD exchange rate almost reached RUB 77). In April, their share shrank to 31%. “Now, one obvious factor in favor of the “protectors of domestic producers” is the almost complete disappearance of competition with imports. In April 2022, it was mentioned as a constraint on output by only 1% of enterprises. This has never happened before,” Sergei Tsukhlo said.
But right now, industry is more concerned not with the ruble exchange rate, but with the halt in supplies of imported raw materials, components, and spare parts for equipment. True, it is planned to solve these problems also primarily with imports - from friendly countries, and this is wh ere the ruble exchange rate “comes in” once again.
But how much of a head start will the ruble weakening give us now? For example, in the spring of 2015, Alexei Ulyukaev, the then RF Minister of Economic Development, reported that the head start that the country had received fr om the ruble weakening “will last not more than 2 or 3 years”. In 2015, the average ruble-to-USD exchange rate in annual terms dropped 1.6 times compared to 2014.
“Now we are in completely different conditions, it is impossible to plan a head start for 2-3 years ahead in view of the fast pace of political and other processes that influence the situation in the economy,” Sergei Zubov argued. In his opinion, it is the current strengthening of the ruble that can be called a head start, because in the event of new shocks, its devaluation from this level “may mitigate the negative economic consequences.”
The press service of the RF Ministry of Economic Development explained that both “an excessive “strengthening” and too strong a “weakening” of the exchange rate are bad for the economy”: in case of the former, domestic production will begin to lose to imports, while the latter will make goods more expensive, thus creating an additional impetus for inflation. Therefore, as noted in the Ministry, “we need a reasonable balance, an equilibrium exchange rate of the ruble, that would benefit both individuals and businesses (primarily exporters)”.
True, there still remains the question of whether the “optimal” exchange rate (RUB 70–80 per US dollar) will really be beneficial for the people, who now apparently will have to mentally prepare for the situation wh ere the ruble may lose from 25% to 40 % of its the current value.
“As for the people, the level of dollarization of their savings has always been relatively high, but now it seems that we are living through the sunset of this era, which had started with the market reforms in the 1990s,” Sergei Zubov explained, adding that “in the context of the policy of moving away from foreign currencies, the weakening of the ruble is not very beneficial for the population as a whole, because it is fraught with an intensification of inflationary processes.”
“In a time of sanctions, only a strong ruble can promote an effective import substitution,” said Sergei Zubov.
Meanwhile, according to Sergei Tsukhlo, in the ranking of industrial growth constraints, the factor of a shortage of raw materials and components soared fr om 10th place in January 2022 to 3rd place as early as April. “In June 2022, according to preliminary data, 71% of enterprises have adequate stocks of Russian raw materials and components, while 36% of them have adequate stocks of imported ones. Insufficient stocks are reported by 18% and 50%, respectively,” he explained.
At the same time, quite recently, at the beginning of this year, the surveys of industrial enterprises conducted by the Gaidar Institute revealed the factor of a weakening ruble to be among the top 5 current industrial growth constraints.
A weak ruble was considered to be a constraint by 35% of enterprises (from year beginning until February 24, the average ruble-to-USD exchange rate almost reached RUB 77). In April, their share shrank to 31%. “Now, one obvious factor in favor of the “protectors of domestic producers” is the almost complete disappearance of competition with imports. In April 2022, it was mentioned as a constraint on output by only 1% of enterprises. This has never happened before,” Sergei Tsukhlo said.
But right now, industry is more concerned not with the ruble exchange rate, but with the halt in supplies of imported raw materials, components, and spare parts for equipment. True, it is planned to solve these problems also primarily with imports - from friendly countries, and this is wh ere the ruble exchange rate “comes in” once again.
But how much of a head start will the ruble weakening give us now? For example, in the spring of 2015, Alexei Ulyukaev, the then RF Minister of Economic Development, reported that the head start that the country had received fr om the ruble weakening “will last not more than 2 or 3 years”. In 2015, the average ruble-to-USD exchange rate in annual terms dropped 1.6 times compared to 2014.
“Now we are in completely different conditions, it is impossible to plan a head start for 2-3 years ahead in view of the fast pace of political and other processes that influence the situation in the economy,” Sergei Zubov argued. In his opinion, it is the current strengthening of the ruble that can be called a head start, because in the event of new shocks, its devaluation from this level “may mitigate the negative economic consequences.”
The press service of the RF Ministry of Economic Development explained that both “an excessive “strengthening” and too strong a “weakening” of the exchange rate are bad for the economy”: in case of the former, domestic production will begin to lose to imports, while the latter will make goods more expensive, thus creating an additional impetus for inflation. Therefore, as noted in the Ministry, “we need a reasonable balance, an equilibrium exchange rate of the ruble, that would benefit both individuals and businesses (primarily exporters)”.
True, there still remains the question of whether the “optimal” exchange rate (RUB 70–80 per US dollar) will really be beneficial for the people, who now apparently will have to mentally prepare for the situation wh ere the ruble may lose from 25% to 40 % of its the current value.
“As for the people, the level of dollarization of their savings has always been relatively high, but now it seems that we are living through the sunset of this era, which had started with the market reforms in the 1990s,” Sergei Zubov explained, adding that “in the context of the policy of moving away from foreign currencies, the weakening of the ruble is not very beneficial for the population as a whole, because it is fraught with an intensification of inflationary processes.”