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. Last Updated: 07/27/2016

Ruble's Rise Comes Before a Fall?

The recent increase in the value of the ruble has offered an encouraging sign of stability in the Russian economy but, as the saying goes, "one swallow does not make a spring".


Most economists would agree that most of the reasons for the ruble's current strength are temporary and few would exclude the possibility that the currency will start to fall again within the next month.


The ruble held steady at 1, 061 to the dollar Monday in trade on the Moscow Interbank Currency Exchange, capping an eight-day series of increases that has raised the ruble from a low of 1, 116.


The 5-percent rise offers a welcome break from the previous six months in which the ruble had fallen on almost every trade, but the increase is not unprecedented.


The strengthening of the ruble resembles the increase in the ruble in December last year when after six months of falls, the exchange rate climbed 7. 5 percent.


But on that occasion, the pause was only temporary and the ruble again plunged.


Sergei Gusev, head analyst for the Moscow Interbank Currency Exchange, said the parallels with the December pause are close.


As in December, both economic and business conditions have temporarily strengthened the ruble, but it is likely that, as happened in December, the crisis in the government's financial policy will send the ruble tumbling again.


The ruble's fall over the last six months has been caused by the huge growth in the money supply. The government has printed rubles to meet the pressure from credits issued by the Central Bank and from the government's budget deficit.


From an economic point of view, Gusev said that over the last few months, investors panicked and the ruble simply fell too fast. The current recovery just compensates for that excessive fall.


He pointed out that the ruble fell 25 percent in May, meaning that it fell faster than inflation which grew only 19 percent.


Traders stopped buying dollars because they found that the real cost of imported goods had risen in price by 25 percent, compared to a general inflation rate of 19-percent.


He also said a few specific business factors have temporarily helped the ruble.


First, the fall in the ruble was stopped by a Central Bank decision to limit the ability of Russian commercial banks to buy hard currency in their own names, resulting in a sharp one-off reduction in the demand for dollars.


Second, Gusev said the end of the business half-year has forced companies to amass rubles to meet a range of mid-year bills and tax obligations.


This explains the ruble's recent strength but the long-term future of the currency will still depend on the resolution of the financial crisis that has been at the heart of the currency's problems.


Last month Finance Minister Boris Fyodorov and Central Bank chairman Viktor Gerashchenko, under strong international pressure, signed an agreement on tighter money and balanced budget policies but it will be politically hard to maintain this financial discipline in the long-term.


According to the Center for Economic Performance, inflation has been gradually trending down for the last three months but it still ran at 19 percent in May. The Central Bank has showed tentative signs of raising interest rates but credit is still growing at 16 percent a month.


Unless these trends are halved next month, it seems certain that the spring improvement in the ruble exchange rate will end before summer is over.