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By John Helmer, Moscow

In the current war with the US, the monetary policy of the Central Bank of Russia and of its governor, Elvira Nabiullina (lead image, right), has been criticized in the State Duma and in the domestic media for catastrophic negligence in exposing the Bank’s currency reserves to the US freeze and seizure, which occurred on February 28, 2022.

The US Treasury described its action as a freeze. “This action effectively immobilizes any assets of the Central Bank of the Russian Federation held in the United States or by U.S. persons, wherever located…The United States has not taken this action alone. On February 26, 2022, partners and allies committed to imposing restrictive measures that will prevent the Central Bank of the Russian Federation from deploying its international reserves in ways that would undermine the impact of United States sanctions and the European Union followed up with their restrictions last night. Our actions demonstrate global support for Ukraine and the commitment to hold Russia’s threatening, authoritarian rulers responsible for their heinous actions.”  

This was easier said than done. Finding the money in order to prevent the Russians getting their hands on it has proved unexpectedly difficult, especially in Europe.  

War between states, even the exceptionalist ones against the heinous ones, can be unpredictable  like that. The medium-term impact of the US action has been a multi-billion dollar outflow of US reserves by other states like China and Saudi Arabia, and a rise in the US Treasury’s costs of debt service, which will continue to grow with time.   

This was not Nabiullina’s intention in failing to shield the reserves and impose capital outflow controls when she had the time and warning to do so. Instead, she has made plain she is not a warfighter. Less plainly, Nabiullina allowed “four people with knowledge of the discussions” to tell Bloomberg she had offered her resignation to the Kremlin in her opposition to the war.  Officially, all she would say in a March 2, 2022,  pre-recorded video message to her Central Bank staff was “all of us would have wanted for this not to happen.”

More garrulous lower-level CBR staff told Bloomberg they were feeling “a state of hopelessness in the weeks since the invasion, feeling trapped in an institution that they fear will have little use for their market-oriented skills and experience as Russia is cut off from the world.” By skills and experience, they meant the endorsements they have craved – and Nabiullina has received – from the International Monetary Fund (IMF), the US system banks and funds, the World Economic Forum, and the Russian politicians who have promoted them and Nabiullina, Anatoly Chubais and Alexei Kudrin. This is a long story; follow the archive here.  

The lobbying against Nabiullina from the warfighting side, from the left economic policy side, and from the oligarchs who demanded low CBR interest rates all failed;  and on March 18, 2022, President Vladimir Putin nominated Nabiullina to a third five-year term. The State Duma confirmed the nomination on April 21, 2022.  

After the political failure of the campaign against her, wartime secrecy requirements have restricted the evidence of the Kremlin orders Nabiullina has been following, especially on the implementation of the capital controls which the Kremlin authorized at the same time as her reappointment. The reported capital outflow in January 2023 appears to be significantly lower than its postwar peak in July 2022, but higher than its prewar levels in January 2020 and July 2021.  

The oligarch loophole for capital export was opened by the June 9, 2022, presidential decree creating a secret Control Commission.    The Central Bank official in charge of the commission’s business, Yury Isaev, resigned after less than eight weeks in the job.  

Isaev’s exit exposed the gap — black hole more like — between what Nabiullina and other government officials say and what they do, and who gains in the process. As the Prigozhin affair demonstrates,  wartime secrecy not only protects Russia’s warfighting capacities, but also conceals many Russian incapacities, so speak.

In the report to follow, just published by Vzglyad, the leading Moscow platform for national security analysis, Nabiullina’s management of the rouble exchange rate is examined, the target of the current devaluation forecast, and the gainers and losers identified.

In this verbatim translation, the data charts, picture,  and captions have been added, together with URL links to English language references which amplify or corroborate the Russian text.    

Source: https://vz.ru/

July 6, 2023
The ruble has adjusted to the new challenges of the economy
The Russian budget needs an even weaker ruble
by Olga Samofalova

The dollar is already worth almost 93 rubles, the euro is about 101 rubles. The Chinese currency has also risen sharply – up to 12.8 rubles. The last time the ruble was so weak was last spring. However, this time there is no source of support to be anticipated, so there will be no sharp reversal. The Russian budget needs an even weaker ruble. This is how the economy adjusts to the change in the structure of exports and imports.

The ruble has broken through the psychologically important mark of 90 per dollar and continues to trade around 93. The euro has already risen to 101 rubles. These are peaks since the end of March last year. The Chinese currency has jumped to 12.8 rubles; this has happened for the first time since April 19, 2022.


Source: https://tradingeconomics.com/
A summary of anti-Russian economic experts, reported in the Japanese propaganda outlet in London, the Financial Times, claimed on May 27 that “many distinguished economists, Russian and western, think the official picture that the Kremlin paints of its wartime economy is actually one big Potemkin village.”  There was no reference to the currency exchange rate.

“The dollar-ruble exchange rate has increased by 6.1% over the past week alone, and in June the dollar-ruble exchange rate jumped by 10.4%. This is the strongest growth since December last year. Since the beginning of the year, the ruble has depreciated by 31.3%,” notes Andrei Maslov, an analyst at Finam.

The basic reasons for this continue, plus new ones have been added. The main reason is an increase in imports with a decrease in exports. By the summer of 2023, the volume of imports of goods and services to Russia has fully recovered and reached the levels before the military conflict, Maslov points out.

Secondly, the currency from export sales often does not reach the Russian market. Russia sells half of its crude oil for export to India for rupees without the possibility of conversion into rubles or another currency, so this money remains a dead weight on the accounts of Russian companies. This issue has begun to be resolved — several Indian refineries are ready to buy Russian oil for yuan.

“The currency that ought to come to the domestic foreign exchange market often does not reach it, as it remains on the external accounts of the exporting  companies outside of Russia. Plus, the high demand for foreign currency in the domestic market is maintained by individuals and companies, who then transfer it to their foreign accounts,” Maslov notes. All this creates a shortage of currency and a corresponding increase in its value.

Increased capital outflow is also associated with the resumption of settlements on securities through the Euroclear system.   “Some brokers are offering  to buy securities abroad for foreign currency in order to then sell them on the Russian market. This creates additional demand for the currency,” the expert notes. Finally, the attempted military mutiny led to the withdrawal of investors [from securities] into safe currency instruments.

The ruble has also been pressured by the decision of the Ministry of Finance to almost halve currency interventions in yuan. At the same time, the demand for yuan is increasing. “The share of Russia’s foreign trade settlements in Chinese currency is growing, while the volume of imports exceeds the volume of exports in yuan, which causes a deficit. In addition, speculative strategies are joining significant market movements, increasing the feeling of a shortage of yuan,” says Vladimir Yevstifeyev, head of the analytical department at Zenit Bank.

Despite the weakening of the ruble, the financial authorities see no reason to panic. The Central Bank has once again issued a statement that this does not threaten financial stability.

“The Central Bank does not see financial stability risks, since the weakening of the ruble is the adjustment of the economy to the changed currency structure of the balance of payments. The Ministry of Finance also remains neutral, because at the current level of oil prices, the budget is more likely to benefit from a weak ruble,” Yevstifeyev believes.  

The budget for this year includes basic oil and gas revenues at the level of 8 trillion rubles. To ensure such revenues, a barrel of oil should cost 4,800 rubles.  “However, now it is necessary to take into account the voluntary reduction in production and exports that Russia is going to adopt. Taking into account this fact, the comfortable ruble price of oil for the budget may amount to between 5,200 and 5,300 rubles per barrel. At current dollar prices for Russian oil, the dollar exchange rate should be at the level of 91-96 rubles. It is also worth adding 3% to 5% to the speculative element in the dynamics of the exchange rate and taking into account that part of Russian exports which is sold in rubles,” Yevstifeyev calculates.

This means that in order for the budget to receive the planned amount of oil and gas revenues, the dollar exchange rate should be even higher than it is now; at the same time as oil prices stay relatively low, as the situation is now.

Still, there is hope that oil prices will rise against the backdrop of Saudi Arabia’s decision to voluntarily reduce production by one million barrels of oil.  And against the background of Russia’s decision to reduce oil exports by half a million barrels since August, in addition to the fact that it has already reduced production by half a million.

Source: https://www.dailyfx.com/crude-oil 

Another point is that a weak ruble can support the manufacturing industry. To be precise,  according to Prime Minister Mikhail Mishustin, this is a key factor this year for the growth of the Russian economy. On the night of July 4, he held a meeting with President Vladimir Putin. Mishustin told Putin he expects that this year Russia’s GDP may exceed 2%, which is higher than the forecast of the Ministry of Economic Development whose growth rate estimate is 1.2%.

Prime Minister Mishustin meets with President Putin on the evening of July 4, 2023. The Kremlin record reports Mishustin reporting in inflation, GDP growth, real wage growth, import substitution and unemployment. The rouble exchange rate was not mentioned in the open record.  

“A weak ruble makes imported goods less accessible, stimulating more active import substitution. This can support the manufacturing industry. On the other hand, the weakening of the ruble is usually accompanied by an increase in inflation, which in turn puts pressure on consumer activity, which negatively affects demand and leads to a deterioration of the situation for domestic producers,” says Yevstifeyev. However, the Central Bank has already given several clear signals that it intends not to let inflation accelerate, so it may raise the bank rate at a meeting in July.  

What awaits the ruble? If earlier there was still expectation for the reverse strengthening of the Russian currency, now experts have begun to lose hope and rewrite their forecasts for the exchange rate. Accordingly, Rosbank has raised its projection for the end of the third quarter of 2023 from 75 to 87 rubles per dollar.

“It is obvious that without support from the balance of payments and an increase in the inflow of currency into the country, the ruble is unlikely to return to 70-80 rubles per dollar. Without operational statistics on the external sector, it is difficult to say with certainty where the equilibrium rate is. However, conditional calculations indicate that the dollar exchange rate at the level of 87-101 rubles can satisfy all the goals of economics and finance,” says Yevstifeyev.

However, Maslov believes that a decrease in Saudi Arabia’s oil production by 1 million barrels per day since July could lead to an increase in oil prices to $80 per barrel, and that in turn should help stabilize the dollar in the range of 85-90 rubles. However, for a more significant strengthening of the ruble, even higher oil prices are necessary,  the expert concludes.

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