Ruble bows to Putin’s wishes, salutes wartime election economy

(Bloomberg) — A rally in the ruble, pushing it toward its strongest level since July, is the latest piece of Russia’s economic puzzle amid widespread expectations of Vladimir Putin’s presidential election in March. The latest piece of the ruble’s puzzle has fallen into place ahead of a tilt in China.

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Since the beginning of October, the yuan’s exchange rate has reversed course, taking it to about 90 against the dollar, close to the average level predicted by the Ministry of Economic Affairs next year. It is said that the recent appreciation is one of the key factors in curbing inflation. Bloomberg Economics now expects economic growth to slow after price growth likely peaked in September.

As Russia’s two-year war in Ukraine comes to an end, the exchange rate has increasingly become a barometer of the health of the economy. It’s also a key variable in the budget, with more allocated for the military next year than any other budget. Other items.

The ruble briefly breached the psychologically important level of 100 to the dollar in October, weighed down by plummeting export revenues and a sharp decline in government spending. The ruble’s fall has prompted the central bank to double official borrowing costs to 15% so far this year, including an emergency rate hike in August.

But the setback did not stop until the government recouped more dollars by reinstating some capital controls on major exporters. Putin said last month that the decision was taken because Russia needed “a slightly stronger ruble.”

The ruble has become the world’s best-performing currency against the dollar since early October, driven by tighter restrictions, higher interest rates and crude oil prices around $80 a barrel. The ruble has gained more than 4% against the dollar so far this month.

The challenge now is to find the optimal balance of the ruble’s value to curb inflationary pressures without cutting into government revenues.

The Russian currency is expected to average $90.1 against the U.S. dollar in next year’s baseline scenario, according to the latest outlook used by the Economy Ministry to calculate the budget. Russia is expected to grow in the first half of 2024, partly due to higher hard currency inflows. The exchange rate has stabilized at 90-92 since mid-year.

This view is basically consistent with market expectations.The currency could continue to rise to 85, but could fall back to the 90-95 range early next year amid sanctions and geopolitical pressures, said chief investment officer Iskander Lutsko. Strategist at ITI Capital Ltd.

What Bloomberg Economics Says…

“Recent strength in the ruble, tighter credit conditions and tighter government controls on fuel prices mean inflation is likely to peak in September at an annualized rate of about 14% and fall back to 9.4% in October . ”

——Alexander Isakov, Russian economist. Click here to read more.

Barclays forecasts a ruble-to-dollar exchange rate of 90 for the current quarter and the following six months. “Overall, we expect recent policy rate hikes to dampen local demand and restrict imports, while the recent rise in Urals prices should help stabilize the ruble,” said Marek Raczko, currency strategist at Barclays in London.

Read more: Russia’s cash inflows gain momentum as oil exports recover

Evgeny Suvorov, chief Russia economist at CentroCredit Bank, said there were negative impacts from factors such as companies using local notes to replace eurobonds, redemptions of major state debt or corporate acquisitions of non-residents. It has also been alleviated.

“There is no need to expect the ruble to fall significantly before March,” he said.

Even after cutting losses, the yuan is still down about 17% against the dollar this year. Other emerging market assets also recovered this week as U.S. inflation data fueled bets on the end of the Fed’s rate hike cycle, while economic data from China also boosted risk appetite.

Sofia Donets, an economist at Renaissance Capital in Moscow, said the ruble was significantly undervalued over the summer but benefited from improved prospects for raw materials, higher export prices and lower imports. Basically, the ruble should be around $85. dollars, she said.

“Can the ruble appreciate and strengthen? We remain cautious.” She said, “Due to continued capital outflows, we believe the ruble will reach 90 rubles against the dollar by the end of the year.”

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