USD/RUB might close the year around 57.5

Oleg Kouzmin, Economist at Renaissanse Capital, on Russian economy and RUB

The Russian Ruble fell to a record-low in mid-December, trading at 80 Rubles per Dollar. However, the currency has recovered since then, and it has been trading generally between 60 – 70 Rubles. In addition, since the biggest pressure on the Russian currency comes from oil, do you think that its sell-off is done? Are there any sufficient premises that the strong volatility of the currency is over?

Generally, the Ruble is feeling itself much better now. We have seen a significant turmoil in the currency during the month of December, which was triggered by a set of various factors. First of all, the drop in oil prices led the Russian currency to tumble. As the prices fall, exports decline respectively and, apart from that, the GDP growth contracts. This year, we see the current account at around $56 billion, not far away from the estimates of the previous year. Second, Russian external debt payments reached nearly $30 billion in one month. As a comparison, Russia should pay off around $90 billion of external debt during the year of 2015, so it is $7.5 billion for one month.

Next factor is the shortage of domestic Dollar liquidity that forced Russian companies to prepare huge cash piles they will struggle to distribute. As a consequence, the Ruble fell far below the fundamental value. Meanwhile, the currency recovered considerably since the start of 2015, despite the US Dollar strength and a weakness of emerging market currencies. Thus, the Ruble becomes more or less fairly valued. Our estimate for the USD/RUB this year is at around 57.5 or close to this level, amid the $60 per barrel oil. As a matter of fact, we could still see some shortage in oil prices next month. Indeed, we hope that such an enormous volatility we have seen previously came to an end.

Speaking of exports and international trade, Russia’s greatest export partner was China, receiving about $2.3 billion worth of military equipment. However, China is looking forward to cut its historical dependence on Russian defense technology and replace it by home-grown equipment. Do you think that other market sectors could be hit too? What consequences do you see if the trading cord will be cut completely?

I do not see any significant changes in export for the Russian side. The exports to Ukraine certainly declined, but it is not quite significant for Russia. As to the military equipment, it holds a rather small market portion in comparison with gas, oil and mineral products that take about 70% of the whole export volume. On the input side, I assume that we will see a contraction in imports to Russia from both Asian countries and Europe.

On one hand, the current Euro exchange rate provides a ground for European imports reduction, however, not as much as the imports coming from China, since the Ruble exchange rate weakened a lot more versus the Renminbi.

On the other hand, since Russian introduction of European food imports embargo, China is now able to provide some cheaper products. Overall, I do not think Russia will struggle hard from the forecasted change of exports and imports.

Since the Russian economic recession, many European tourism and luxury companies were hit hard and forced to cut prices in order to limit the damage. According to UN World Tourism Organization, international travel spending by Russian citizens fell by 6% in 2014, a significant drop from growth of more than 20 % during the previous years. How do you evaluate the international business market for the next couple of years?

Of course, the Ruble exchange rate weakness to the extent of 1999, much greater than during the crisis in 2009, definitely changes the consumption levels. Thus, such a background is highly negative for international businesses, providing tourism opportunities for Russian citizens, as well as for businesses that provide luxury products.

People will now be buying medium quality products instead of high quality ones, amid the drop in domestic demand and weak exchange rate. However, the Ruble devaluation opens great opportunities for domestic businesses and international companies. For example, people from the Eastern Europe could be buying cars assembled in Russia, as companies may shift their assembly lines. With no doubt, the situations have its pluses and minuses, but it all depends on the sectors we look at.

Where do you see USD/RUB for the Q2 of 2015?

In general, I think we might see some marginal Ruble weakening from 60 to 62 during the next week. However, at the end of the month the tax payment period will start and the Ruble might strengthen again, so there will likely be a rather flat movement.