Russian Macro: Exchange Rate in Comfort Zone to Favor Growth

Russian imports continued to soar in April – both in absolute and y-o-y terms. It reached $26.3 bln that month, the level not seen since mid-2014 (an increase by 49.4% y-o-y). In 2Q20 imports contracted rather moderately (by 13.0% y-o-y) compared with the increase seen in April and expected rise in 2Q21. The negative impact of rising imports on economic growth will be compensated by growth of real exports and household consumption fueled by rapid increase in consumer lending. On the production side of GDP, these developments will be reflected by fast growth of trade (wholesale and retail).

The ruble was depreciating in the past ten years irrespective of a consistently positive trade balance. Note that the current account was also positive during this period (apart from rare exceptions over some months). Despite the widening trade surplus in recent months, the ruble failed to appreciate so that the current level of the exchange rate looks quite comfortable for Russia, especially for the budget. The oil price has fluctuated within a very wide range since 2012 and its current value over $70/bbl looks quite high. Still, the ruble shows no signs of appreciation despite the strengthening current account.

One should hardly expect any strong movements of the USD/RUB exchange rate unless the oil price moves sharply in some direction. The ruble may appreciate if the oil price climbs higher, but it is unlikely to return to stronger levels (in nominal terms) seen in the past. Russia’s relatively high inflation and unconvincing rate of economic growth weaken the nominal ruble to dollar exchange rate over the long term. That being said, the current USD/RUB 72-74 exchange rate looks a kind of a comfort zone for the ruble – even with the oil price above $70/bbl.

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