© Oleg Kouzmin
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Currently we do not have a really good Ruble story. One of the most important factors behind this is the global sell-off story. Compared to the beginning of 2013, the Ruble lost 13% against the U.S. Dollar, which is mostly in line with Brazilian and Indian currencies, as well as the Turkish Lira and South African Rand. Thus, it is not just some tapering issue behind the global sell-off, but such problems as a slowdown in growth of emerging markets alongside with the rebound of growth in developed markets.
Talking about the domestic factors, there are two main issues – the decline of Russia's current account from $72 billion in 2012 to only $33 billion in 2013, while we forecast $23 billion for 2014. The second factor is the Bank of Russia's policy to shift to free floating exchange rate regime at the end of this year. Currently, the Bank of Russia has a floating interest rate corridor and it does not buy or sell the national currency making it cheaper or more expensive, but only smoothes the Ruble dynamics. Also, the CBR is going to implement the inflation targeting regime starting from 2015 in order to take better control over inflation and domestic interest rates.
However, we believe that the majority of emerging market currencies is now undervalued, thus when the high volatility ends, we expect to see some appreciation in those currencies. The Ruble would not be an exception; nevertheless, we keep our forecast for USD/RUB at 35.50 for the end of 2014 and 40 against CBR's target Dollar-Euro basket.
Finally, talking about the Russian economy, I would like to mention that a weaker currency is beneficial for Russia, due to the tight monetary and fiscal policies. Also, there are external headwinds despite quite high oil prices, therefore weaker Ruble becomes the only parameter that would support our country. Officials do not feel less comfortable with a cheaper currency, but they are probably not really satisfied with the fact that depreciation happened so fast. Therefore, the authorities need a weaker Ruble to develop domestic industrial production, but they do not affect the exchange rate at all, whereas the CBR does influence it, yet only to smooth the volatility. Moreover, it is challenging enough to persuade investors to invest in Russia, when the economy is expected to grow at 3.3% while US is likely to hit 3%, too.
The Winter Olympic Games in Sochi had started and economists' expectations are ambivalent – some predict that the Ruble would rally during this event and others say that the Russian currency will depreciate even more. What is your outlook on the Ruble?
I would say that Ruble's dynamics will depend largely on the emerging market's currency story in the upcoming days rather than on the Olympic Games, which is probably going to be supportive for the Ruble because foreigners will spend their money in Russia, but I do not believe that it could be the factor that will drive the national currency.
Talking about this week, if the turmoil ends, then the Ruble probably will appreciate, but in case it continues for one or two weeks, then probably Russia's currency would depreciate significantly reaching 36.50 - 37 level in the coming weeks. However, it is expected that the Bank of Russia would not implement special measures in contrast with other emerging market banks.
Hosting the Winter Olympics at great cost in Sochi is unlikely to give the Russian economy a big boost, ratings agency Moody's mentioned a week earlier, undermining one of President Vladimir Putin's main goals at the Games. To your mind what will be the real effect on Russia's economy?
There was a boost in the economy before, when we had built infrastructure in Sochi in 2013 and even earlier. However, it was not really a huge support, as due to Olympics the government had cut some other investment projects, which basically marked a shift from one investment to another.
Currently some analysts suggest that there is going to be a very marginal uptrend or downtrend on the back of Olympic Games, while others do not include this long-awaited sporting event in their economic forecasts, which is probably not right because there may be some political effect.
We, however, have estimated that the positive inflow to Russia would account for approximately $2 billion from tourism, contributed by an increase in export services and foreigners, who come to Russia and spend their money, providing a boost to domestic demand. Also, we assume that in the short-term the consumer sentiment in Russia would improve to some extent.
Moreover, it could also provide some positive effects if Russian athletes perform successfully there. For instance, according to my Finnish colleagues, there is a high correlation between domestic retail sales and main hockey match results of the national team.
What will be the main drivers for the Ruble throughout the year of 2014?
When the turmoil comes to an end, there will be a decline of the current account surplus through the whole year. Another factor is still rather elevated capital outflows, thus fundamentals are not that supportive for the Ruble. Also, the Bank of Russia finally moves to inflation targeting regime and is likely to make the Ruble floating in the Q4, which is not supportive for the Russian currency.
Currently, the market rates are not that high compared to other emerging markets, whereas for Russia they are quite elevated, thus, this would probably support the Ruble to some extent.
In contrast to the 2008-2009, we see no pressure on FX market coming from households, and I believe we would not see the household panic, as people are now much more comfortable with floating exchange rates than they were before, and this would eventually spur the Ruble to move more in line with its fundamental.
What are your forecasts for USD/RUB for the end of Q1 and end of the year?
We believe that future Ruble's performance will largely depend on volatility in the market. Still we expect that at the end of the Q1 the volatility would definitely end. I would say that the Ruble is likely to appreciate noticeably to the 35 level or even lower. In the longer term our forecast for USD/RUB is at 35.50.