Focus on currencies – Weakening rouble good for Russia’s economy, experts say

The depreciation of Russia’s rouble against the US dollar this week continues a trend from last quarter, and local experts regard it as a positive development, with potential to boost the local economy.

According to Russian newspaper Kommersant, local market participants are displaying increased demand for the US dollar, driving down the strength of the rouble against the dollar.

Last quarter, the rouble depreciated 10% against the dollar, which on Tuesday exceeded its recent high of 32 RUB/$. Further exchange fluctuations are expected to be driven by external factors in the coming months, say analysts.

The Ministry of Economic Development of the Russian Federation has lowered its outlook for the rouble for the end of this year. Instead of the 4.4% currency appreciation versus the US dollar forecasted originally, the ministry now predicts more modest growth of 1.3%.

Its predictions are driven by the expected depreciation in the oil price, which in turn drives down the strength of the local currency. This is not as negative for Russia’s economy as it sounds.

Dmitry Mikhailov, fund manager for Russian equities and balanced funds at Renaissance Asset Managers, explains Russian exporters actually profit from a lower rouble, as their exports become cheaper.

Export-oriented industries find it easier to sell their product abroad as a result.

Some investors still worry that the rouble may continue its downward journey, until it becomes detrimental for Russia’s economy, but this is no longer possible since Russia’s Central Bank has adopted a floating exchange rate for the currency.

Evgeny Gavrilenkov, chief economist at Troika Dialog, explained that a floating exchange rate makes the currency much more resilient to external shocks. “Flexible exchange rates act as a shock absorber,” he said.

At the same time, as Jerome Booth, head of research at Ashmore Investment Management puts it, “Russia is a massive net creditor,” with substantial foreign exchange reserves, which further protects its currency.

Some large banks have a positive outlook for Russia’s currency, despite its Ministry’s downbeat prognosis.

BNP Paribas’ office in London, for example, is advising investors to buy the Russian currency to replace their Turkish lira holdings.

BNP Paribas’ experts explain that, while Turkish authorities are boosting economic growth by lowering interest rates, Russia’s central bank can be expected to keep its rates unchanged, or even raise them in the near future.

This would benefit the rouble against other currencies.

But for the time being it remains undervalued – and therefore worth holding.

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