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Economic Forecast Is Optimistic For The Russian Ruble

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EDITOR NOTE: As with its global peers, Russia took a big hit from the COVID pandemic. But in contrast to most, Russia managed to minimize the pandemic’s economic damage. For instance, the country saw a smaller drop in GDP as compared with its peers. Russia’s inflation rate also ticked up, but the increase was well below the global average. Comparatively speaking, Russia’s national debt is only 19% of its GDP, whereas America’s debt soars at an alarming 136% of GDP. Russia is undergoing an economic recovery that far outpaces its biggest rival--that is, the United States of America. Not surprisingly, the Russian ruble is showing signs of strength and robustness, as capital inflows from global investment typically follow strength, and to Russia, it goes. But what exactly are the factors reinforcing the ruble? Perhaps you’ll be surprised; or maybe not. It has a lot to do with the dollar (though in the negative): Russia is holding a large share of euros and yuan; it's implementing a fierce de-dollarization effort, and it’s accumulating more gold in its reserves than all of the dollars it sold. In other words, the ruble’s strength is a direct consequence of the dollars dumped and the gold bought to replace the failing currency. 

The Russian ruble had a slow start to 2021, but the Eastern European currency has accelerated over the last week, buoyed by bullish forecasts for the ruble and the broader economy. With rallying energy prices and slower-than-expected inflation, Moscow could witness a strong recovery in the post-coronavirus global marketplace.

According to the Federal State Statistics Service (FSSS), the consumer price inflation (CPI) climbed to 5.2% in January, below market forecasts of 5.3%. But it was higher than the 4.9% reading in December. This was also the highest rate since April 2019, driven by food prices soaring 1%.

On a monthly basis, price inflation rose 0.7% in January, which was also slightly lower than the median estimate of 0.8%.

Russia’s auto market continues to get hammered, with total vehicle sales sliding 4.2% in January from the same time in the previous year.

The Central Bank of Russia reported that foreign exchange reserves declined by 0.85% last month to a little more than $590 million. The central bank dominated international business headlines when it was reported that the institution’s gold reserves surpassed that of the US dollar. The organization also saw a higher share of euros and the yuan, suggesting that the nation is expanding its de-dollarization efforts.

Last week, the FSSS announced that the gross domestic product (GDP) contracted 3.1% in 2020, the biggest economic slump in 2009. However, Russia suffered a smaller economic drop than its peers, and market analysts forecast a rebound in 2021. Experts say that the pace of vaccinations could have one of the most significant roles in the country’s recovery.

Artem Zaigrin, an economist at Sova Capital in Moscow, wrote in a research note:

The pace of vaccinations could be one of the most important drivers for the resumption of economic activity. A more aggressive fiscal consolidation and additional waves of COVID-19 if herd immunity is not reached could lead to downside risks.

Russia has seen its coronavirus pandemic easing since hitting a peak of more than 28,000 cases per day. The seven-day average has declined to below 17,000. In total, Russia has had 106 million confirmed infections, with a death toll of 2.32 million.

Meanwhile, Morgan Stanley released its latest outlook for the ruble after the currency hit a two-week high against the greenback and the euro. The investment giant anticipates a 6% appreciation in the currency, opining that “it’s time to get back into Russian assets.”

Also, Fitch Ratings reaffirmed its BBB rating with a stable outlook for Russia’s Long-Term Foreign-Currency Issuer Default Rating (IDR).

The USD/RUB currency pair tumbled 0.55% to 74.2359, from an opening of 74.6088, at 14:05 GMT on Monday. The EUR/RUB dropped 0.35% to 89.64, from an opening of 89.86.

Originally posted on FX Daily Report

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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