The Special Operation To Devalue The Ruble Is Going According To Plan

In recent weeks we have seen a significant weakening of the Russian ruble against the dollar, an emergency meeting of the Central Bank of the Russian Federation, an immediate increase in its discount rate by 350 bps, namely to 12%, and a weak pullback from 100 to 93 rubles per dollar.

An emergency meeting of the central bank is in itself a bad sign. The Bank of Russia has convened such meetings only three times: when the war with Ukraine began, when the full-scale invasion of Ukraine began, and now. We can see a finished groundwork for scientific research on the influence of foreign policy on monetary risks.

Of course, the strength of the Russian currency in itself is of little interest, and the hope that devaluation or inflation can catalyze protest sentiments in the Russian Federation is very naive. But it is worth examining the causes of the current “ruble collapse,” especially considering what we failed to see in the decisions of the Bank of Russia last week.

Since the Russian Federation is a powerful exporter, the trade balance there is usually also in surplus: no matter how much they import, their exports, especially oil and gas, will always prevail. According to the results of the second quarter, there is also a surplus in the trade balance. But which one? The account of current operations in the second quarter of 2022 was 77 billion dollars, and according to the quarterly result of this year – only 5 billion. In general, for the first half of 2023 they have a little more than 20 billion dollars, or almost 7.5 times less, than in the first half of last year.

The main reason is that the powerful exporter is still losing power: the volume of Russian exports in the first half of this year is more than $100 billion less than last year ($205.6 billion in 2023 versus $306.4 billion in 2022). Consequently, the volume of foreign exchange earnings of the Russian Federation decreased by almost 33%.

The issue is not in value, but in quantity - the physical volumes of goods supplied from the Russian Federation are decreasing. Oil was in demand because of the embargo, the price ceiling, and the literal coercion of constant discounts from new, non-European buyers.

The gas is mainly extracted by the Power of Siberia pipeline, and the main buyer there is China. Other deliveries are so-so, because the warehouses are full, the price, accordingly, is lower, and the Russian Federation has not been considered a reliable supplier for a long time.

Non-oil exports are also declining. On the one hand, the economy of China, the main buyer of Russian metals and coal, is not growing very actively, on the other hand, the EU market, a key former partner, has disappeared, and on the third hand, the search for new sales markets requires discounts, that is, even what is sold, does not bring the desired income.

Exports of services have also decreased by 12% if we compare 2022 and 2023, or by a quarter, if you compare the first half of 2022 and 2023. Construction, telecommunications, IT services and transport have been decreased a lot. In general, only the “travel” category remains profitable, thanks to Russians fleeing the Russian Federation and Tajiks coming to the Russian Federation.

Meanwhile, imports are growing steadily, adding 19.5% for the first half of the year (from $126.6 billion in the first half of 2022 to $151 billion in the same period of 2023). Indeed, there still are more exports than imports, but the difference is shrinking – by almost 70% over the past six months.

In monetary terms, import volumes increased by 35% year-on-year. The EU was replaced by China, the value of supplies from there increased by 79%, and other countries are gradually increasing their volumes. Parallel import works, the simplified procedure for importing electrical appliances and equipment has been extended until the end of 2023. Only imports of services fell by a quarter overall (again, excluding the “travel”).

The updated budget rule of the Russian Federation did not help the situation. Oversimplified, it worked like this: if the treasury's income is higher than the established base level of oil and gas income per month, the central bank bought currency with the surplus money and replenished the Russian National Wealth Fund, if it was lower, then it sold currency and replenished the treasury with the obtained rubles. The Bank of Russia has already officially recognized the helplessness of this scheme.

After all, international reserves of the Russian Federation decreased by 12 billion dollars from April to August alone. And the ruble has depreciated by almost 30% against the dollar since the beginning of the year. Moreover, devaluation as such would benefit the Russian Federation because it would increase the profits of exporters and curb the appetites of importers. But devaluation is usually accompanied by inflation, which is fueled by crazy government spending, obviously related to the war, and it is unlikely that the central bank can have any influence on this factor. And in general, what is economically correct is not always politically correct, especially when it comes to such sensitive things as exchange rates and prices.

So that the head of the Bank of Russia E. Nabiullina does not doubt this, Putin’s economic adviser M. Orieshkin announced that the Russian economy needs a strong ruble, and the central bank has all the tools to normalize the situation “in the near future.” There is no need to repeat it to Nabiullina twice - the announcement of the emergency meeting appeared a few hours after Orieshkin’s words.

The thing is that no matter how much you call the ruble freely convertible, the yuan a reserve, and the dollar dead, damned importers still want to buy the dollar for some reason. Instead, due to sanctions and the “toxicity” of the dollar and euro for the Russian Federation, exporters receive about a quarter of their payments in yuan, and a little more than 40% in rubles.

On August 16, the great monetarist V. Putin allowed Rosneft to export for normal currency by a separate decree, which in general concerned the supply of agricultural products. So far, only them, but the list of companies that are not covered by the general rules is determined by the president, so it can and probably will change.

In general, everything works like this: the exporter receives all payments to a special account at Gazprombank, he immediately sells the currency payments to the Bank of Russia, and transfers rubles to the company. At the beginning, there was an obligation to convert 80% of the exporters’ foreign exchange earnings in this way, then 50%, and later they became governed completely “case by case” and a separate commission began to determine the share required for sale. As we can see, Putin allowed his friend Igor Sechin to work without strange conversions, commissions, and obligations.

That’s all.

The only thing that will really be affected by the increase in the discount rate is lending, there in the consumer segment there was an increase of 636 billion rubles in June alone. (17.3% if we compare 2022 and 2023), in general, indebtedness reaches 31.5 trillion rubles. So, probably, the rate increase will force subsidized mortgages and consumer loans to shrink. But its influence on other factors will be very indirect. Considering that the cause of the current imbalances is mostly the friction in foreign trade, where exports are shrinking and imports are steadily increasing, one rate is not enough to solve the problem. And the increase in the price of money in the economy also suppresses the own production of goods that can be exported.

The Bank of Russia did not dare to take a risk and introduce at least some administrative measures that could affect the currency market. Well, really, what are the restrictions, when all the rich men of the Russian Federation are friends, best men, matchmakers, cooks, and drivers of the dictator. It cannot be compared to rolling over preferential mortgages. It is obvious that the Russian government, choosing between the electorate and the elites, chooses the latter every time, no matter what Orieshkin wrote there.

This is good news. Again, not because the inevitable inflationary pressure will push Russians to protests and resistance but because neglecting pragmatic economic decisions in favor of political ones is always a dead end. But if you have already dreamed about tomorrow’s collapse of the Russian Federation, then this is not a quick way, but a very instructive one.

First of all, for us – because our export-import balances are much worse than Russia’s.

In January–June 2023, the export of goods was 85.7%, and the import was 120.7% compared to January–June 2022. Indeed, fortunately, the import part will decrease rapidly if Ukraine wins and no longer needs arms supplies. Indeed, fortunately, the export part will grow if, after winning, Ukraine can open sea routes to solve logistical issues. But the increase in production will not be so rapid, and the National Bank of Ukraine is unlikely to wait for this moment to return to market exchange rate formation. So, today’s trouble of the Russian Federation is our tomorrow’s headache. And it is worth looking for tools to deal with this problem, because at the moment it is not very clear how to survive with such imbalances, even if the Russian Federation is defeated.

Read this article by Yuliya Samayeva in russian and Ukrainian.