Russia Said to See Ruble Stable Through 2019 in Draft Budgetby and
Economy Ministry said to forecast ruble near 64-65 to dollar
Currency outlook improves after period of volatility, decline
Russia is drafting its budget under the assumption of three years of ruble stability, according to two government officials familiar with the discussions.
Economy Ministry projections see the average exchange rate stable in 2017-2019 at about 64 to 65 against the dollar, under a base-case scenario with an oil price of $40 a barrel, the people said, requesting anonymity because the details aren’t yet public. In its April forecasts, the ministry estimated a ruble rate of 67-68 this year and saw the currency strengthening to the 62-63 range by 2019. It traded 0.6 percent stronger at 64.39 to the dollar as of 10:25 a.m. in Moscow on Wednesday.
The outlook dovetails with the increasing confidence of Russia’s biggest companies that the currency is putting behind it a period marked by the collapse in oil prices, sanctions over Ukraine and a shift to a free float. Stability is already setting in, with the currency of the world’s largest energy exporter climbing from 67 per dollar at the end of the first quarter, and a measure of anticipated volatility falling this month to the lowest since the Bank of Russia stopped managing the ruble in November 2014.
“Russia’s economy would benefit from a stable ruble as it would allow the central bank to gradually ease monetary policy,” said Piotr Matys, a currency strategist at Rabobank in London. “Making a long-term forecast at a time when there is so much uncertainty is very tricky, to say the least.”
Already running its widest deficit since 2010 this year after oil’s collapse, Russia is preparing its budget for the next three years after the Finance Ministry proposed a fiscal gap of 3.2 percent of gross domestic product in 2017, compared with about 3 percent in 2016. It then plans to reduce the shortfall by one percentage point each year to balance the budget by 2020.
The Russian currency has climbed 1.4 percent this month, extending the second-best advance in emerging markets in 2016. The 60-day correlation between oil and the ruble dropped to 0.61, near the lowest in a year. A reading of 1 would mean the two trade in lockstep. Brent rose as much as 1.7 percent to $46.66 a barrel in London on Wednesday.
Supporting the ruble is the central bank’s decision on Friday to keep its key interest rate unchanged until year-end. That makes the currency attractive as a carry-trade, when investors borrow where rates are low and invest in higher-yielding assets. Carry traders have reaped 22 percent from investing in the ruble this year, the best return in emerging markets after Brazil.
The ruble has recovered this year after tumbling to a record 85.999 in January as crude prices collapsed. In 2014-2015, it lost more than half its value. Confidence is improving after the shock of the free float snowballed into Russia’s biggest currency crisis since the debt default of 1998, and contributed to the failure of companies including the second-largest airline.