How The Russian Government Is Stabilizing The Ruble, And What That Will Cost
September 12, 2023
  • Maxim Blant
    Economic commentator, Radio Free Europe/Radio Liberty
Maxim Blant on how the government is trying to combat the depreciation of the ruble, what problems it is running into along the way, and how the authorities are dressing up the interests of the military-industrial complex as concern for the population.
The dollar-ruble exchange rate, April-August 2023.
Since mid-August, the depreciation of the national currency has become perhaps the main concern of the government and the Bank of Russia. The weakness of the ruble has ceased to be just an economic issue and has moved into the political sphere. There is no doubt that the authorities have enough economic, administrative and even informal levers to prevent further weakening, at least in the medium term. The only question is at what cost that stabilization will be achieved.

Political milestone

On Monday, August 14, almost immediately after the opening of trading on the Moscow Exchange, the dollar passed the 100-ruble mark, while by the middle of the day it had strengthened another one and a half rubles. On the same day, Vladimir Putin’s aide on economic issues, Maxim Oreshkin, published a column on the website of the state news agency TASS entitled “A strong ruble is in the interests of the Russian economy.” The column ends with the assertion that “the weak ruble is complicating the structural restructuring of the economy and negatively affecting real incomes of the population,” which seems at least debatable.

From the standpoint of household incomes, everything is straightforward: a weak ruble means expensive imports, higher inflation and a decrease in the purchasing power of wages, pensions and social benefits, though there are nuances. Oreshkin did not explain why the weak ruble is complicating the structural restructuring of the economy; instead, he focused on finding the reasons for the depreciation and painted a rather interesting picture. The economy is recovering swiftly. The driver of the recovery is fiscal stimulus. However, despite the sharp uptick in budget expenditures, there was no major strengthening of the ruble. The main reason is the central bank’s overly soft monetary policy.

If you look at the structure of the money supply, lending to companies and the population played a key role in accelerating demand. Thus, corporate lending led to RUB 9.5 trillion of additional demand in the economy, while household lending added RUB 3.3 trillion. In recent months, lending has been accelerating. The acceleration of consumer lending is especially concerning. These figures significantly exceed the volume of the budget deficit, which since the beginning of the year amounted to only RUB 1.5 trillion. Overall, since the beginning of the year, the budget channel has absorbed the money coming from the economy, providing a negative impact on the money supply,” writes Oreshkin.

Oreshkin does not ask what role credit-driven demand from the population and the corporate sector played in the bounce-back growth. Thus, it emerges that all the successes were thanks to the Ministry of Finance and all the problems were the fault of the central bank.

The Bank of Russia simply could not ignore such an unambiguous “signal from the Kremlin.” On the morning of August 15, it announced a key rate hike from 8.5% to 12.0% (read Nikolai Petrov’s piece on it in RP). By this time, the dollar had softened to 95 rubles. This unexpectedly hawkish decision convinced market participants that the worst that could happen had already happened. The authorities clearly demarcated the line for ruble weakening that threatened even more serious effects. However, it has since emerged that, firstly, 12.0% is clearly not the end, and secondly, raising the key rate is far from the only way to stop ruble depreciation.
Maxim Oreshkin, Putin’s aide on economic issues. Source: Wiki Commons
Exporters are responsible for everything

It would be unfair to say that until August 14 the Russian authorities were blissfully unaware and only Oreshkin’s column opened their eyes to the weakening of the ruble that had gone too far. In reality, measures began to be taken even as they approached the “round” mark of 100 rubles per dollar.

The central bank had started raising the key rate at its meeting on July 21. And in the press release it is directly stated: “the dynamics of domestic demand and the weakening of the ruble that has occurred since the beginning of 2023 significantly increase pro-inflationary risks.” Later, in early August, the Bank of Russia announced that from August 10 it would stop buying foreign currency on the market under the so-called fiscal rule to “reduce the volatility of financial markets.” Moreover, the central bank actually started FX interventions and began selling yuan from the National Wealth Fund for RUB 2.3 billion a day. And it promised to continue this until the end of 2024.
September 6 was followed by reports that in the period September 14-22, the volume of daily interventions would be increased by almost an order of magnitude, up to RUB 24.4 billion a day.
It is curious that not only the Bank of Russia, but also the Kremlin tried to stabilize the FX market before August 14. On August 8, Putin signed a decree “On a Special Procedure for Payment For Russian Agricultural Products” about trading grain “for rubles.” The scheme is the same as the one with gas. Buyers will have to open special FX and ruble “Z” accounts in specially authorized banks – they differ from ordinary bank accounts in that they can only be used to pay for goods from a special list or to fulfill obligations to the Russian tax or customs service.

Next, the buyer transfers currency to a Russian bank (how to do this without connecting to SWIFT is a separate question, but let’s say it is transferred). The bank exchanges the currency for rubles – on the market or at its own rate, it depends – and credits the rubles to a ruble account from which the seller receives money for his goods.

The ultimate goal, as in the case of gas, is that all FX earnings, down to the last cent or yuan, should go to Russia, to a bank account from an approved short list, controlled in the most serious way.

In fact, even after August 14, the efforts of the authorities to stabilize the ruble have been concentrated on the same two areas. The Bank of Russia is raising the key rate, restricting credit, while the government is putting pressure on exporters.

On August 16, Vladimir Putin held a closed meeting with members of the government and the head of the Bank of Russia, Elvira Nabiullina, at which it was decided that financial controls with a bar for the mandatory sale of FX earnings by exporters would not be introduced yet. It also emerged that before this, the government had consulted with business representatives for two days. The result was an agreement, which ministers told Putin about during the meeting and at the same time the newspaper Vedomosti.

Exporters agreed to sell more hard currency on the Russian market. Meanwhile, the government will monitor their activity in the FX market and make sure that they are not skirting their obligations. To obtain this “voluntary consent” it took two days of threatening them with currency controls and even tax increases.

Vedomosti sources say that it was not the oil industry that took the main hit, as one might think. Officials reasoned that they were already selling enough currency to pay all the required taxes and fees. There is also nothing more to take from Gazprom: since last year, the company has been selling gas as if for rubles, and all the currency that buyers pay for gas goes through accounts in Gazprombank, the flows transparent to the Russian authorities.

So the only major exporters left are metallurgists and fertilizer producers. They are the ones tasked with stabilizing the ruble. And though the agreements are informal, both Putin and the public were informed about them. So if something happens, everyone will know who to point the finger at.
Thus, a number of large private Russian companies have been obliged to carry out FX interventions when the dollar exchange rate does not go in the direction that the authorities would like.
However, for exporters themselves, ruble depreciation means additional profit.

As a result of these decisions, in the foreseeable future the ruble will have a certain ceiling and floor. Thus, there is no longer any need to talk about the Russian FX market. And without access to insider information, it is pointless to even try to analyze this market.

Even in Russia, everything that is going on is being called a conspiracy of big players to manipulate the market. And the fact that the government itself initiated this conspiracy is entirely in line with the increasingly widespread intervention of the state in various spheres of life, including the economy. Suffice it to recall how government officials have repeatedly forced entrepreneurs to “voluntarily” chip in to cover the budget deficit, a practice that began even before the war.

At this point, it would seem, the issue of ruble depreciation could be considered resolved. It is clear that in the foreseeable future the dollar will not rise above 100 rubles and will not fall below 80. The central bank will try to make things easier and “deflate” the credit bubble, thus providing a “soft landing” for the unexpectedly overheated economy. In a word, there is stagnation ahead with a new “currency corridor.”

However, in early September it suddenly emerged that the discussion about stabilizing the ruble was not over. It continued, and out in the open, at a conference hosted by the Bank of Russia and dedicated to its tenth year as a mega-regulator. There, Nabiullina warned of another rate hike. Finance Minister Anton Siluanov, present at the event, spoke in favor of returning to the mandatory selling of part of FX earnings by exporters and complained that his position did not coincide with that of Nabiullina, who opposes strict restrictions, since they may prevent exporters from circumventing international sanctions. And also that the view of the central bank is still winning out.

Who needs what kind of ruble?

Ministry of Finance: Ruble depreciation = higher oil and gas revenues. Siluanov’s concern that the tightening of monetary policy has been designated as the main tool to combat the falling ruble is quite understandable. Raising rates means increasing the cost of borrowing not only for businesses and households, but also for the state. Government bonds will have to be placed at a higher interest rate. Meanwhile, tightening FX controls as a tool would make export operations, which have gone into the shadows due to sanctions, more transparent. This means increased tax collection.

And since we are talking about interests, it is appropriate to recall that throughout the second half of 2022, the financial and economic bloc of the government was busy dealing with exactly the opposite problem – weakening an overly strengthened ruble. This was done not least in the interests of the Ministry of Finance, as oil and gas revenues most directly depend on the exchange rate.
Gazprom headquarters in Lakhta Center (St. Petersburg). The Russian gas giant Gazprom's net income for the first half of the year fell to the lowest level since 2020 amid sharply lower gas exports to Europe. Source: Wiki Commons
Exporters: Ruble depreciation is good, higher rates are bad. Another obvious victim of a strong ruble (and, accordingly, another beneficiary of its depreciation) is exporters. The situation is especially bad at Gazprom, which, due to sanctions, has basically lost the European market. At the end of August, the company reported expectedly disastrous results for the first half of 2023. First of all, this affected the company’s core business – gas production and sales. Revenues from gas sales more than halved year-over-year, from RUB 3.5 trillion to RUB 1.7 trillion.

According to Russian accounting standards, the company’s loss amounted to RUB 255 billion; by international standards, a RUB 296 billion gain was minted, though it was driven by Gazprom Neft.

For comparison, in the first half of 2022, the gain by international standards exceeded RUB 2.5 trillion, 8.5 times higher. But even if we consider that this was inflated by the energy crisis, and compare 2023 with the same period from 2021, the difference is also more than impressive. Back then, Gazprom’s gain fell just short of a trillion rubles.

In the first half of 2021, 1,000 cubic meters of gas for non-CIS countries cost $208. Now, Gazprom stopped disclosing export prices. But in Europe, the average price for the first half of the year was about $500 per 1,000 cubic meters. Taking into account the so-called “oil peg” – the price formula that has always been used by Gazprom and is based on oil quotes – we get $309 per 1,000 cubic meters, 50% higher than before the war and the energy crisis.

There is no doubt that
“If the ruble had not fallen throughout the first half of the year but had stabilized at the levels of the end of last year and the beginning of this year, Gazprom’s numbers would have looked even more disastrous.
Domestic manufacturers: Ruble depreciation = elimination of foreign competitors; higher interest rates = death. The most curious thing is that the weak ruble became a hindrance for manufacturers focused on the domestic market. Simply because if your declared goal is “import substitution” and this is what you mean by structural adjustment, then there is no better way than devaluing the national currency. Imports become expensive and uncompetitive. Manufacturers who pay for labor, raw materials, taxes, utilities and other costs in a depreciating currency receive significant advantages in both the domestic and foreign markets.

The only problem is that, with a weak currency, imported equipment and components inevitably become more expensive. However, if the currency continues to fall, the investment pays for itself. What looks too expensive today becomes even more expensive tomorrow. Investments are worthwhile, even if borrowed funds are invested and you have to pay interest on the loan. Therefore, Oreshkin’s thesis that a weak ruble is complicating the restructuring of the economy looks dubious.
UralVagonZavod, a machine-building company located in Nizhny Tagil, Russia, is the largest battle tank manufacturer in the world. Source: Wiki Commons
Defense industry: Ruble depreciation = losses. It is another matter if by structural restructuring we understand what is happening in reality – a sharp increase in the share of the state military-industrial complex in the economy. They do not need to worry about competition; they care little about interest on loans. Since last year, military factories have been operating on an advance payment basis. Meanwhile, the import of components – which are becoming more expensive due to ruble depreciation, and without which neither tanks can move, nor missiles can fly – is critical for this sector. They were already paid for finished products under state defense contracts when the ruble was much stronger, but due to the rising exchange rate, costs are growing, and it is not entirely clear how they will be covered. So,
“The current battle for the ruble is primarily in the interests of those who are profiting from the war.
Population: Ruble depreciation = depreciation of income + depreciation of debts

Oreshkin’s statement that a weak ruble is hitting people’s incomes would be fair if not for one circumstance – Russians’ extremely high level of debt. According to the Federal Bailiff Service, over the year the number of Russians who stopped servicing their loans increased by a quarter or 3,300,000 people. At the end of the first half of the year, the number of defaulters whose cases were handed over to bailiffs reached 17,700,000, almost a quarter of the country’s economically active population. For these people, both ruble depreciation and inflation, accompanied by an increase in wages and indexation of payments from the state, mean depreciation of debts and a reduction in their debt burden.

The sharp hike in rates resorted to by the central bank means more expensive loans for both producers and end consumers. This means that the positive effect of ruble depreciation for import substitution will be offset by unaffordable loan payments. In other words, either investment in the production of consumer goods will stop, or producers will raise prices even faster to meet additional obligations to banks. Consumer demand will naturally fall. There will be fewer people who can afford to buy something with a loan. For those who continue to use credit, real disposable income will fall (i.e. what remains adjusted for inflation and minus mandatory payments, including loan payments). Thus, it remains to be seen what is worse for real incomes – the depreciation of the ruble or the hike in the key rate that is far from a guarantee that the ruble will begin to strengthen.
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