• Ruble has strengthened against all 11 former republics in 2016
  • Russian currency’s real effective rate is highest in 12 months

The ruble’s status as a world beater isn’t doing it any favors in its own backyard.

After depreciating against almost all of its 11 ex-Soviet peers for two years, the Russian currency has gained versus every one of them in 2016. The ruble’s real effective exchange rate, measured against Russia’s major trading partners while stripping out the effects of inflation, is already at the highest in 12 months.

“In the long term, real appreciation is always bad, if the trend is sustained,” said Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki. “It undermines the competitiveness of local producers.”

With the region again unsettled by flaring tensions around Ukraine, Russia is squandering the advantages of a weaker exchange rate after the central bank’s shift to a free float in late 2014 and the crash in oil prices. The reversal of fortunes risks further throttling demand for Russian exports like heavy-duty trucks and consumer appliances in the ex-Soviet underbelly that spans Belarus near the border with the European Union to Central Asian states along the frontier with Afghanistan.

With the ruble’s 20 percent loss against the dollar last year adding to a nosedive of 44 percent the previous year, some of its old partners had little choice but to follow suit. Both Kazakhstan and Azerbaijan devalued their currencies twice last year, helping regain lost ground with Russia as their economies reeled from oil’s collapse.

Currency Outliers

Most currencies in the former Soviet Union have been on the sidelines of a rally in emerging markets this year as interest rates near zero or below in developed nations drive investors to hunt for higher returns. Only six of 24 emerging-market currencies tracked by Bloomberg have weakened so far in 2016.

The Commonwealth of Independent States, a loose grouping of former Soviet countries, is Russia’s third-biggest trading partner among regional blocs after the EU and Asia Pacific. Russia’s exports have dropped to every CIS member state so far this year. In the first six months, shipments to Azerbaijan are down 55 percent from a year earlier, with exports to Kazakhstan sliding 27 percent, Federal Customs Service data show.

While hurting exports, a stronger ruble is a boon for importers, helping them recover faster, according to Dmitry Polevoy, chief economist for Russia at ING Groep NV. Overall Russian imports in the first half shrank only 9.4 percent, compared with a 29 percent plunge for exports, according to the central bank.

The ruble isn’t yet strong by historical standards, meaning Russia can still ride the benefits of the more competitive currency for longer, Polevoy said.

“Comparing the current exchange rate with long-term averages, the ruble remains weak,” he said. “The advantage remains, even if it isn’t as significant as at the start of the year.”

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