Russian ruble: causes of the fall and prospects
Over the past few days, the Russian ruble has lost about 10%. In a natural way, this attracted considerable interest to it. So, we need to talk about the current and medium-term prospects of the ruble.
The current decline in the Russian currency is the result of a few factors. Both internal and external ones. Let's list the key theses and give some explanations on them.
External causes of the ruble fall.
1. The news about a new sanction package from the USA.
This is a US-announced package of sanctions affecting Russia's sovereign debt and state-owned banks. The package has not yet been formally adopted, nevertheless this factor provoked the emergence of a panic wave in the foreign exchange market. But this is not the only external problem of Russia, the Russian economy and the ruble.
2. Trump Trading Wars and devaluation as a way of self-defense.
Trump unleashed a global trade war in the US against the rest of the world format. The main weapon of Trump is protectionist tariff barriers. Significantly increasing import tariffs, the US makes its domestic producers more competitive. As a protection tool, the affected countries use the devaluation of the national currency. Chinese yuan, Indian rupee, Turkish lira and other currencies of emerging countries have lost 10% and more recently. Even developed countries such as the EU, Canada, Australia have significantly weakened their currencies.
3. Oil seems to have peaked.
The actual abandonment of OPEC + and the start of a new race to increase oil production puts an end to the hopes for oil prices growth in the future. Given that even with the current maximum values of oil quotations over the last couple of years, Russia's budget is literally bursting at the seams, it's even frightening to imagine what will happen to it if prices of "black" gold drop to the area of $30-40 per barrel (more than even in the foreseeable future).
4. Political isolation of Russia
Politics is a concentrated expression of the economy. Russia's actions in Ukraine, Syria, interference in the elections in the United States, the case of the Scrypal in the UK, etc., shape Russia around the image of a rogue country, which has a negative impact on the country's economy.
Internal causes of the fall of the ruble
1. Unpopular reforms as an indicator of problems in the economy.
This is primarily about the budget deficit. To combat it, a few rather painful reforms are proposed, ranging from raising the retirement age to the growth of VAT. Most painful was precisely the issue of raising the retirement age, since the Russian authorities inherently sacred the term "stability", elevating it to the Absolute. And now they refuse it, and in the worst part. Obviously, it is vital to go for such unpopular measures, that is, all other options for solving the problem have already been exhausted.
In addition, these reforms are clearly not the last in the list. Incoming the increasing of the tax burden on companies and others.
All these in aggregate worsen the already weak investment climate in the country.
2. Inadequate structure of the economy.
Russia is often called a gas-station country, hinting at its total dependence on hydrocarbon exports. Strategically, such a structure looks very vulnerable, especially against the backdrop of a shale oil and gas sector and alternative energy technologies (already now, the increase in energy capacity in the US is not due to the increase in hydrocarbon consumption, but from alternative energy sources).
That is, the current structure of the Russian economy is, at best, the last century, while to remain competitive, the economy must compete in the high-tech sphere, which is not in sight.
That is, in the long term, the gap between the developed countries and Russia will increase. And the resource rent, due to which the economy is now living, is a dead-end path of development.
If we add to this the growth of the state's share in the economy (the last signal is the purchase of the retail giant Magnit by the state-owned VTB), the vector of development or, more correctly, the degradation of the Russian economy becomes evident.
3. Inefficient infrastructure projects.
To stimulate economic activity, government funds are very actively invested in various mega-infrastructure projects such as the Olympic Games in Sochi, the World Football Cup, the construction of the Crimean Bridge, etc. The medium- and long-term economic effect of such projects is extremely doubtful, but the expenses are simply gigantic, especially for a country that is in acute shortage of financial resources. Well, talking about the launch of a new mega-project of building a bridge to Sakhalin with a value of 500 billion rubles only confirms our previous conclusions.
4. Problematic banking and other sectors of Russia
The process of "cleaning" (if mass bankruptcy of banks in Russia can be called so) of the banking system continues. All this happens against the backdrop of the growth of bad debts in the credit portfolio of banks.
In this light, it is also worth noting the wave of bankruptcies among touristic companies, mass cuts in several industrial enterprises-giants in Russia etc.
So, here and now the ruble looks vulnerable because of the panic wave associated with the news of sanctions. In the medium term, the weak Russian economy and unpopular reforms that reduce economic activity, as well as the potential decline in oil prices, will put pressure on the ruble. In the long term, an inefficient corrupted economy coupled with a dubious vector of its development creates the prerequisites for further lagging behind the Russian economy from developed countries, which will also have a negative impact on the ruble.
Total, on all time horizons analyzed, the ruble looks vulnerable, so any growth of it should be used for sales.
The current decline in the Russian currency is the result of a few factors. Both internal and external ones. Let's list the key theses and give some explanations on them.
External causes of the ruble fall.
1. The news about a new sanction package from the USA.
This is a US-announced package of sanctions affecting Russia's sovereign debt and state-owned banks. The package has not yet been formally adopted, nevertheless this factor provoked the emergence of a panic wave in the foreign exchange market. But this is not the only external problem of Russia, the Russian economy and the ruble.
2. Trump Trading Wars and devaluation as a way of self-defense.
Trump unleashed a global trade war in the US against the rest of the world format. The main weapon of Trump is protectionist tariff barriers. Significantly increasing import tariffs, the US makes its domestic producers more competitive. As a protection tool, the affected countries use the devaluation of the national currency. Chinese yuan, Indian rupee, Turkish lira and other currencies of emerging countries have lost 10% and more recently. Even developed countries such as the EU, Canada, Australia have significantly weakened their currencies.
3. Oil seems to have peaked.
The actual abandonment of OPEC + and the start of a new race to increase oil production puts an end to the hopes for oil prices growth in the future. Given that even with the current maximum values of oil quotations over the last couple of years, Russia's budget is literally bursting at the seams, it's even frightening to imagine what will happen to it if prices of "black" gold drop to the area of $30-40 per barrel (more than even in the foreseeable future).
4. Political isolation of Russia
Politics is a concentrated expression of the economy. Russia's actions in Ukraine, Syria, interference in the elections in the United States, the case of the Scrypal in the UK, etc., shape Russia around the image of a rogue country, which has a negative impact on the country's economy.
Internal causes of the fall of the ruble
1. Unpopular reforms as an indicator of problems in the economy.
This is primarily about the budget deficit. To combat it, a few rather painful reforms are proposed, ranging from raising the retirement age to the growth of VAT. Most painful was precisely the issue of raising the retirement age, since the Russian authorities inherently sacred the term "stability", elevating it to the Absolute. And now they refuse it, and in the worst part. Obviously, it is vital to go for such unpopular measures, that is, all other options for solving the problem have already been exhausted.
In addition, these reforms are clearly not the last in the list. Incoming the increasing of the tax burden on companies and others.
All these in aggregate worsen the already weak investment climate in the country.
2. Inadequate structure of the economy.
Russia is often called a gas-station country, hinting at its total dependence on hydrocarbon exports. Strategically, such a structure looks very vulnerable, especially against the backdrop of a shale oil and gas sector and alternative energy technologies (already now, the increase in energy capacity in the US is not due to the increase in hydrocarbon consumption, but from alternative energy sources).
That is, the current structure of the Russian economy is, at best, the last century, while to remain competitive, the economy must compete in the high-tech sphere, which is not in sight.
That is, in the long term, the gap between the developed countries and Russia will increase. And the resource rent, due to which the economy is now living, is a dead-end path of development.
If we add to this the growth of the state's share in the economy (the last signal is the purchase of the retail giant Magnit by the state-owned VTB), the vector of development or, more correctly, the degradation of the Russian economy becomes evident.
3. Inefficient infrastructure projects.
To stimulate economic activity, government funds are very actively invested in various mega-infrastructure projects such as the Olympic Games in Sochi, the World Football Cup, the construction of the Crimean Bridge, etc. The medium- and long-term economic effect of such projects is extremely doubtful, but the expenses are simply gigantic, especially for a country that is in acute shortage of financial resources. Well, talking about the launch of a new mega-project of building a bridge to Sakhalin with a value of 500 billion rubles only confirms our previous conclusions.
4. Problematic banking and other sectors of Russia
The process of "cleaning" (if mass bankruptcy of banks in Russia can be called so) of the banking system continues. All this happens against the backdrop of the growth of bad debts in the credit portfolio of banks.
In this light, it is also worth noting the wave of bankruptcies among touristic companies, mass cuts in several industrial enterprises-giants in Russia etc.
So, here and now the ruble looks vulnerable because of the panic wave associated with the news of sanctions. In the medium term, the weak Russian economy and unpopular reforms that reduce economic activity, as well as the potential decline in oil prices, will put pressure on the ruble. In the long term, an inefficient corrupted economy coupled with a dubious vector of its development creates the prerequisites for further lagging behind the Russian economy from developed countries, which will also have a negative impact on the ruble.
Total, on all time horizons analyzed, the ruble looks vulnerable, so any growth of it should be used for sales.
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