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. Last Updated: 07/27/2016

Isn't Ruble Fluctuation A Sign of Stabilization?

Predicting what will happen to the ruble has suddenly become complicated. The currency has started going up as well as down.


This is, of course, exactly what normal, healthy currencies do. Most of the time, the dollar or the yen are close to a medium-term equilibrium point and so they will wander aimlessly up and down responding to short-term factors.


But no one believes it is that simple here in Russia. For years, one could always confidently predict the ruble would go down. But, over the past month, it started rising and indeed economists started to worry it would rise too sharply.


But maybe we are somewhere near equilibrium. The factors pushing the currency down may be about equal to the factors pushing it up.


Yegor Gaidar recently predicted to Interfax that the ruble would end the year at 5,000 to the dollar. Boris Fyodorov predicted it would crash again. My bet is that Gaidar is about right.


Why agree with Gaidar that the ruble will not do too much over the next six months?


Well, first, I exclude the possibility that the ruble has much further to rise. Economics and finance ministers have this week subtly backed the idea that the government should stop big fluctuations, both up and down. They are saying indirectly that the government should intervene in the market to buy dollars, trying to stop further unsustainable rises in the ruble.


Another factor against further rises is inflation, which is still over 7 percent a month. Until that figures changes, the market will have to be a little skeptical about the currency.


On the other hand, I cannot see too many grounds for a sudden fall given a continuation of current fiscal policies. (A big "if" in the current political climate.)


Financial markets have plenty of reasons to buy rubles. The interest rates available in Russia, although in general falling, are still high relative to expected inflation. This makes people want to buy rubles for investment purposes. Besides, the Central Bank's new rules raising reserve requirements for banks are also pushing up demand for rubles.


A few influential economists are saying the strength of the ruble itself will be the cause of its future fall. The fear is that by buying dollars with rubles, the government is adding to the money supply. That means inflation.


This is to some extent an example of the typical Russian view that everything good will turn out bad. A fair amount of the growth in money supply will be put into investments, especially government securities and perhaps shares in privatized companies. This would have little effect on measured inflation.


Moreover, the process works both ways. The government is not just issuing rubles. It is also accumulating a huge stockpile of dollars with which it will be able to stop any big falls in the exchange rate.


The up and down factors are more or less in balance. Russia could really be headed for financial stabilization and equilibrium.


Confidence is returning, but that confidence will ebb and eventually be undermined completely unless inflation falls to some low single digit by year's end.


Inflation will fall if the government actually holds firm on its budget targets in terms of spending and revenues. Ironically, early parliamentary elections probably make it easier to control spending. A short election campaign gives politicians less time to do stupid populist things. Of course, what happens after the elections?





Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.