Analyst Milchakova: "Russian authorities are not going to solve economic problems at the expense of a weak ruble"

Strengthening the dollar to 100 rubles is beneficial for the Russian economy, but the authorities are afraid to take such a step due to concerns that the devaluation of the national currency will get out of control. This was reported by Reuters, citing an unnamed source in the Russian government.

"The powers that be" want the ruble to weaken with a guarantee that they will be able to keep it when necessary, because otherwise the Central Bank of the Russian Federation's measures to combat inflation will have to be tightened. To what extent Western financiers are right in their reasoning about the ruble and the capabilities of the Russian authorities, "MK" found out from leading analyst of Freedom Finance Global Natalia Milchakova.

— Is the Reuters version similar to the truth?

— This is more like a leak from a country unfriendly to Russia. Apparently, someone there needs such information “interventions” to check how much the Russian public can be intimidated by a potential collapse of the ruble. But this is unlikely to be possible. A weak ruble is beneficial to Russian exporters, and to the state as well, since export oil with a weak ruble costs much less in rubles than with an expensive ruble. That is, if Russian Urals oil is sold to importers, say, at $55 per barrel, and the dollar rose to 100 rubles, this means that with such an exchange rate, a “barrel” of Russian oil in rubles would cost 5,500 rubles, or 25% more than with a dollar exchange rate of 80 rubles. In the second case, when converted into rubles, the cost of a barrel of Russian oil would be only 4,400 rubles.

In principle, it can be assumed that the weakening of the ruble is beneficial to the state, but it is not intervening yet, because in Russia the ruble exchange rate is not fixed, and oil and gas revenues have not yet fallen, and imports, accordingly, have not grown to a critical level at which it is necessary to weaken the national currency.

— Our government can do it at its own discretion?

— Yes, the state can weaken the national currency. But the ruble is strong today precisely because the authorities are taking measures to support the ruble. For example, by introducing currency restrictions. The requirement for exporters to sell foreign currency earnings, introduced back in 2022 and extended several times since then, will most likely be extended, although the issue of the percentage of foreign currency earnings that must be sold has apparently not yet been finally agreed upon. Let me remind you that the Central Bank of the Russian Federation also limits citizens' ability to withdraw foreign currency from foreign currency deposits opened before March 9, 2024.

— If the government can weaken the ruble, then why, according to Reuters, is it afraid that the process could become uncontrollable? Isn't there a contradiction here?

— Governments and central banks can easily manage the national currency exchange rate, weaken or strengthen it at their own discretion, but only if the exchange rate is fixed. If the rate is floating, as in the Russian Federation, then even currency interventions in some cases may not save the currency from collapse when the market does not trust the currency. Such cases have already occurred. For example, in 2021, when Turkish President Erdogan officially announced the government's abandonment of the policy of a strong national currency, it was not initially expected that the Turkish lira would become one of the weakest currencies in developing countries in the world in the following years. Since November 2021, the lira has depreciated more than threefold: then the US dollar was worth 12.8 lira, and today it is already 38.85 lira.

At the end of 2023, the Argentine government announced a “managed devaluation” of the already weak national currency, the peso, and here is the result: the peso has fallen in value by almost half in less than two years.

When deciding to devalue the national currency, especially if this currency, like the country's economy, is highly dependent on external shocks and is not a global reserve currency, governments often do not take into account the laws of the market and risks. In such cases, if the authorities "allow" the weakening of the currency, this is a signal for the market to flee to other currencies, most often to the dollar. Therefore, given the experience of other developing countries, the Russian authorities and the Central Bank of the Russian Federation are apparently not going to solve economic problems at the expense of a weak ruble, realizing that the market reaction may be the opposite. At the end of 2023 and 2024, when the ruble was falling due to a currency shortage in the country, the government and the Central Bank of the Russian Federation, on the contrary, came to its aid instead of taking any measures to further weaken it.

— What do you think will happen to the ruble exchange rate in the coming weeks?

— We expect that until the end of May the dollar may fluctuate within the range of 79-83 rubles, the euro — 89-93 rubles, the yuan — within the range of 11-11.5 rubles. These are market rates, but the government has influence on them: the Ministry of Finance buys currency according to the budget rule, the Central Bank of the Russian Federation “mirrors” the operations of the Ministry of Finance, selling currency and supporting the ruble, and at the end of the month the ruble is traditionally supported by the tax period, when exporters exchange currency for rubles to pay taxes. That is, the government has influence on the ruble today, but it is more likely to support the ruble than to weaken it.