© Oleg Kouzmin
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In our view, a weaker Russian currency brings more gains to the overall economy, supporting the country during such ambiguous times. First of all, a cheaper Ruble maintains domestic industries. Secondly, the currency reduces the import growth, partially encouraging import substitution. And finally, it balances out the budget, especially during these times when oil continues to fall in price. However, the negative aspect of this situation could be the higher inflation. We have increased our inflation forecast to 8,2 % from previous 7,5 %. Still, the pace of depreciation must be highly considered. A fairly moderate pace clearly brings more advantages, whereas a steep currency fall brings uncertainty to the market, affecting expectation sentiments. Nevertheless, the continuous depreciation on the Ruble was rapid enough during both months of September and October and we hope the Central Bank elevates the price a little bit.
Considering the recent drop in oil prices and sanctions imposed from Western Europe, to your mind, will the central bank's currency interventions be sufficient to escape further weakening of the Ruble?
The Russian Central Bank interventions are not only in order to smooth the Ruble fluctuations. Ultimately, it would unlikely prevent further weakening of the currency, however, hopefully, it could elevate the recent depreciation for at least some time. Moreover, the RCB was not operating on domestic Forex market since May until the beginning of October. Hence at this moment, when the intervention has started, around $1 billion of domestic currency was sold already. Thankfully, the market does not need that much amount of the currency at the present. Therefore, another $5 billion could help in the exchange rate stabilization.
Where do you see the EUR/RUB and USD/RUB pairs heading by the end of this year?
I assume that even at the current price levels, the Ruble looks undervalued for October 2014. However, the core problem behind the Ruble is that nowadays it is not determined by any matter-of-fact, for example, the oil prices. The main reason which stands behind a sharp decline in the Ruble is simply the fall of liquidity on domestic financial markets. The amount of the Dollar liquidity that the Central Bank should provide for the market is not significantly large. Probably about $10-$15 billion were already sold, which should eventually smooth the fluctuation. Meanwhile, in case the Russia-Ukraine conflict calms down this year, Russian Central Bank‘s counterparts will broaden their limits. Keeping all the facts in mind, the Ruble might depreciate from current levels to 38.50 versus the Dollar until the end of 2014 and 48.9 versus the Euro.