On December 25th, Alexey Kudrin, the former Russian Minister of Finances, and Mr. Gurvich, the Head of Russia’s economic expert group, discussed the near-term prospects of the Russian Ruble together with some other experts, Market Leader reports.
Their predictions are gloomy. Why? Obviously, it is all about declining oil prices and Western sanctions. The experts assume that if oil prices stay close to $60 per barrel, Russia’s GDP is likely to drop 4,1% while the average exchange rate of USDRUB is going to be 58,6RUB per 1USD. The experts say chances are that inflation may go out of control amid active monetary financing. This seems to be the very scenario the Russian economy and financial system are currently following.
On top of that, the experts are almost sure that the Western sanctions imposed on Russia this year are likely to remain in place for a couple of years, maybe even till 2018. Under such circumstances, the Russian economy is obviously facing major challenges, which may grow even bigger if oil prices continue to fall and stay around the current util-year lows.
Still, they do not deny the possibility that the sanctions will be canceled earlier than expected. Still, Plan B should be worked out to get ready for the worst-case scenario if the sanctions are still there for 2-3 years. They predict the budget to be the biggest loser. If the GDP stays flat for 5 years, the real value of budget income declines by nearly 30% while the deficit widens by 6%. At the same time, this is going to exhaust the reserve funds.
The worst-case scenario implies an investment decline by 17,5% while the Russian budget gets 14,8% less income to make the budget deficit 3,1% of the GDP, simultaneously diminishing the reserve fund down to $69bn.
At the same time, the experts underline the necessity to get ready for a prolonged period of low oil prices along with years of sanctions. They say that the latest high oil prices seen in mid 2014 resulted from the Fukushima nuclear meltdown and the civil war in Libya rather than some other factors. As the global supply grows, we should get ready for the average price of $70 per barrel or so.
Mr. Kundrin says that amid mere limitations existing in financial markets, Russia is forced to follow the path of creating a mobile type of economy. The control over capital flows is being reinforced. This frightens some investors who stopped lending to Russian banks and businesses in general and suspended the purchases of Russian bonds and stocks. This is a natural outcome under such circumstances.
As for the mid-term prospects of the Russian Ruble, the experts say that while the Russian money supply was roughly equal to 30 trillion rubles along with $400bn in foreign currency reserves, we could see USDRUB moving up to 80. If the money supply grows within a couple of years and the central bank spends its foreign currency reserves according to the doomsday scenario, the USDRUB exchange rate may well hit 100-120RUB per 1 USD. The prediction is backed by multiple facts, including the fact that the total debt in the Russian banking system quadrupled relative to mid 2013. Russia is still trying to adapt to al those changes.
The bottom line is that Russia needs to restore all external ties. Without it, all other measure will be inefficient in terms of reaching the goal.
As of today, December 26th, the US Dollar is down a little bit against the Russian Ruble. It is currently trading around 52,88RUB. Still, this is still a bearish reaction to the latest strong rally in the market of USDRUB.
