The events of the last month and a half have shattered the usual picture of the world
Speaking in Warsaw on 26 March, Joe Biden said: “More than 400 individuals and companies have left Russia, including even McDonald’s restaurants. The ruble has turned to ash and is worth more than 200 rubles [per U.S. dollar].” The president’s entourage became uncomfortable for him: at the time, the Russian ruble was officially set by the Central Bank of the Russian Federation at 95.6618 rubles for the US dollar and 105.2662 rubles for the euro.
After the start of Russia’s military operation in Ukraine and the first sanctions by the collective West, the ruble began to fall rapidly, with a record low of around 120 rubles per dollar and 127 rubles per euro recorded on the Moscow Exchange on March 9. The fall occurred because foreign exchange market participants did not really understand what was going on and had put the worst-case scenarios for Russia into the rouble price. However, since the second half of March, the contours of possible events for the next few months began to be seen.
The ruble began to win back the fall of the first three weeks of the sanctions war. In the morning of 7 April, the dollar exchange rate stood at 74.26 roubles and the euro at 80.84 roubles on the Moscow Exchange. Observers called this a “sigh of relief” for market participants. Many feared that the fifth package of anti-Russian sanctions, which was being prepared in the US and the European Union, would seriously affect the main supplies of raw materials from Russia. Both sets of sanctions were in place, but there was nothing scary to be found in either package, from the market participants’ point of view.
Many are predicting a further strengthening of the Rouble, but this is in the near term; beyond that (until about the end of the year) it will depend on the actions of both the collective West and Russia.
Some experts even predict that the rouble may strengthen twice as much as it did at the beginning of April. Here, for instance, is a Bloomberg analyst publication titled “Putin May Collect $321 Billion Windfall If Oil and Gas Keep Flowing,” based on estimates by the US bank Goldman and the Institute of International Finance (IIF).
Let me remind you that the state of monetary union of any country depends on the state of its balance of payments. And the first and main section of this balance is the current operations. The current operations section, in turn, consists of payments for trade in goods and services (trade balance) and payments in the form of transfers of wages, dividends, interest on loans and credits, etc. The second section (financial transactions account) reflects capital flows in the form of direct and portfolio investments, loans, bank and trade credits, etc. If a large surplus (surplus) arises in current and financial transactions, all other things being equal, the national monetary unit should appreciate against foreign currencies. On the contrary, with a large deficit (negative balance), the exchange rate of the national monetary unit should fall.
The third and fourth sections are balancing, or equalising, sections: “Net Errors and Omissions” and “Change in International Reserves”. The sum of all four sections (accounts) should result in a zero.
The balance of payments picture for Russia is as follows. During the three decades of its existence, the Russian Federation has had a constant surplus of merchandise exports over imports. In some years it was simply gigantic. There has also been a large surplus in payments to other countries. Last year, merchandise exports amounted to USD 493.821 million, merchandise imports to USD 303.995 million, and the surplus was USD 189.826 million. Exports exceeded imports by 1.63 times! What happened to this gigantic surplus? Part of it went to cover the deficit in trade in services ($19.525m) and the current account deficit in investment income ($43.519m) and a few minor items. This results in a current account balance of $122,040 million. A gigantic amount! If it had been countered by the ruble mass in the domestic market, the ruble exchange rate would have been 40 or 50, not 80 rubles.
However, the trick is that this enormous currency mass is withdrawn from the Russian market. Firstly, by exporting capital out of Russia, which is reflected in the financial transactions account. Secondly, as a result of the Russian Central Bank buying up foreign currency to build up international reserves. Last year, the net outflow of private capital from the country amounted to USD 72.556m. And the increase in international reserves was USD 63.525m.
Data from the Bank of Russia show that in January of this year, everything continued to move in the same direction: export revenues significantly exceeded payments on imports, the trade surplus was, as always, large, current account surplus as always, net capital exports were maintained, and international reserves were growing at a rapid pace. And the rouble exchange rate was around 78 roubles per US dollar.
The events of the last month and a half have broken the usual pattern.
Firstly, Russia’s export revenues did not fall as a result of the collective Western sanctions, but rose: the sanctions created an artificial shortage of energy resources in the world market and the foreign exchange earnings from Russian gas and oil exports increased. And Russian imports slumped. As a result, the trade surplus rose sharply from its January value. And the current account surplus rose even more sharply (in particular because the withdrawal of investment income from Russia for foreign business has been blocked).
Secondly, the Russian authorities have put up a barrier for capital exports. These decisions primarily concern foreign capital which wanted to flee the country. As for Russian capital, it cannot be lured abroad to be stripped and robbed.
Thirdly, Russian capital has stopped doing what it used to do: leave part of its foreign currency earnings from exports abroad, accumulating them in offshore jurisdictions. On the one hand, Russia has introduced a compulsory sale of 80% of foreign currency proceeds in rubles. On the other hand, the Western “expropriators” clean out all foreign currency stashes of Russian kleptomaniacs to the last cent.
Fourthly, the usual build-up of international reserves in the form of currency purchases by the Central Bank and its placement on the accounts of foreign banks and treasury securities of other countries has disappeared. Foreign currency is now accumulated in the accounts of Russian banks. As a result, we are seeing a rapid build-up of foreign exchange inside Russia. In the domestic market, the balance between the currency and ruble masses has shifted sharply in favour of the former, leading to a weakening of the dollar and the euro and a strengthening of the Russian ruble.
This sanctions paradox is what Bloomberg writes about in the article. The agency’s analysts calculated that Russia could earn more than $320 billion from oil and gas exports in 2022. That’s about 35% more than in 2021. And Goldman Bank and the Institute of International Finance (IIF) expect Russia to have a record current account surplus of $205 billion in 2022 (almost 1.7 times more than last year). Without the usual sterilization of such a gigantic mass of currency, the ruble exchange rate will inevitably strengthen. Foreign experts say that in a few months it could reach the value of 50 roubles per US dollar.
However, these seemingly positive developments for Russia will quickly come to an end.
First, a sharp strengthening of the ruble will reduce the competitiveness of Russian exports and stimulate imports. Russia’s customary trade surplus may disappear, as will its current account surplus.
Second, over time, the countries of the collective West will get rid of Russian energy purchases. The exorbitant prices of natural gas and oil will eventually return to normal and the physical volume of energy exports from Russia will fall sharply.
IIF experts believe that a total energy embargo on Russia by the entire European Union, the UK and the US could be imposed within the next two years. This would result in a more than 20% drop in our country’s production and could cost Russia up to 300 billion dollars in export revenues, depending on price fluctuations.
I believe the main strategic goal today should be to create an independent, self-sufficient Russian economy. This would make our country invulnerable to any, the most “hellish” sanctions of the collective West. If we focus on such a long-term goal, it is clear what Russia’s current economic policy should also be. The abundant currency rain that has started to fall over Russia and which, according to Western experts, will continue to fall for a year or two, should be used for constructive purposes. And we must act quickly, because then we will have a currency drought.
By constructive aims I mean re-industrialisation, without which the creation of an independent, self-sufficient economy is unthinkable. All foreign currency revenues must be concentrated on the state and used in the first instance to buy investment goods (machines and equipment or means of production), in accordance with government-directed economic development plans. If we succeed in implementing such a currency maneuver over the next two years, we will avoid a severe “currency drought” and we will continue to build a strong, independent economy. And the exchange rate of the Russian ruble will then be of interest only to narrow specialists.
Valentin Katasonov, FSK
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