Due to inflation and reduction in economic growth
By Vestnik Kavkaza
In January the ruble weakened seriously. Experts believe that this follows a general trend of developing markets. Alexei Vedev, Director of the Center of Structural Studies of the Yegor Gaidar Economic Policy Institute, thinks that the weakening of ruble is due to external factors, which are strengthened by panic on the market and a speculative attack: “Selling of foreign currency grew by 3-4 times in comparison to the whole of 2013… Currency instability is helped by the mess in the banking sector. I don’t know whether it is rehabilitation of the banking system or its mopping-up. Strategically I agree that something has to be done with the banking system; but tactically I don’t understand what is going on. The Central Bank has to settle the situation, as objectively the euro doesn’t cost 48 rubles or a dollar - 35 rubles.”
Konstantin Bushuyev, the head of the Market Analysis Department of ‘Otkrytie’ Broker House, is sure that there is no crisis, as well as no devaluation: “Devaluation is a term which is used for countries with rather strict regulation of exchange rate and for currency movements which have an abrupt and strong character. The Central Bank has already turned to a more flexible ruble rate. The provided interventions are insignificant. Secondly, of course what has happened is a significant movement, but it is less than 10%. There is no devaluation, even despite the serious weakening of the ruble.”
However, according to Bushuyev, the ruble rate will continue to weaken and the reason for the weakening is two fundamental factors: “A high rate of inflation and a drastic drop in the pace of economic growth. If there is no economic growth, there is no competitiveness of the economy; and together with high inflation this leads to a weakening of the exchange rate.”
Yevsei Gurvich, the head of the Economic Expert Group, recalls that Russia has huge devaluation experience – in 1998 and 2008: “This time we cannot say that our devaluation means crisis, unlike 1998 and 2008. This time the source is outside our country. It was the decision by the Federal Reserve System to scrap the program of quantitative easing steadily. Why does this influence seriously the markets of Russia and other countries with developing markets? When the USA supported its own economy, it simultaneously supported other economies, as a part of the money which was imitated within the program of quantitative easing flew to other markets; they supported oil prices and other countries. Today they have decided that their economy is recovering and they don’t need it anymore; thus, the indirect support of economies of developing countries was cancelled.”
According to Gurvich, Russia is experiencing a devaluation of 7-8%, and even though this doesn’t mean a crisis, the weakness of our economy is obvious. “The ruble is weakening. First of all, it means that our attractiveness to foreign investors is reducing. Secondly, now it is unbeneficial to take foreign loans for a Russian businessman. Previously, when someone took a loan he would give less in rubles than he took; now he will have to give more than he took. As a result we will see a return of the dollarization of the economy; exchanging money in dollars. It seems we will see capital outflow… We should forget about hope of a settlement of the problem of slow growth and stagnation by reduction of rates of interests. It’s gone to the past; it was typical for the pre-crisis and post-crisis epoch. Today we should forget about it. From now on we will have to work under conditions of stable oil prices and we will see no cheap money. It means we have to say goodbye to illusions and provide serious reforms.”
