Russia Has Found the Answer, and It’s 62 (Rubles Versus Dollar)

A 375 billion-ruble ($6.6 billion) bet on curing Russia’s addiction to foreign goods hinges on the exchange rate being just right.

A one-size-fits-all approach may not exist, but Industry Minister Denis Manturov says a level “optimal” for every part of the economy engaged in “import substitution” puts the ruble at 62 against the dollar, about 8 percent weaker than where the Russian currency is currently trading. Appreciation to 53-55 could already result in “stagnation” for some of the projects, he said in an interview in St. Petersburg.

Denis Manturov

Photographer: Simon Dawson/Bloomberg

“As the industry minister, I support a weakening of the ruble, but unfortunately I can’t influence its levels,” said Manturov, 48. “We are in constant dialogue with the central bank, and it hears us.”

Appeals for a weaker currency have been a tough sell with the Bank of Russia, which has said it won’t compromise on a free-float regime that policy makers credit with helping soften the country’s longest recession this century. Despite repeated efforts to talk down the ruble, and President Vladimir Putin hint in April that the government is looking for “market-based measures” to affect the exchange rate, no concrete steps are under discussion, three senior officials with knowledge of the matter said last month.

For Manturov, an exchange rate that keeps Russian businesses competitive is a crucial piece in a campaign to make goods or services domestically that were previously produced abroad. Of the 375 billion rubles invested in such projects in 2015-2016, more than a quarter of the funds was contributed by the government, he said.

“The devaluation effect hasn’t yet been exhausted for Russian industry,” Manturov said. At the same time, “gains in the ruble have affected the pace of import substitution.”

Putin’s Mantra

The program has been a priority for Putin since sanctions imposed over the Ukrainian conflict in 2014 limited Russia’s access to global markets. The statistics service now tracks indicators that show the achievements of import replacement.

“I was glad about the sanctions,” Manturov said. “Thanks to them, we have the motivation to develop our own industry.”

The effort got a boost when the ruble lost half its value against the dollar in 2014-2015 after the collapse in oil prices. But a comeback that started early last year is blunting much of the edge companies once enjoyed, with the ruble keeping up the world’s biggest rally since touching a record low in January 2016. 

Stubborn Ruble

Russia has little to show for the efforts it’s made so far to guide the ruble weaker, even with purchases of foreign exchange conducted by the Finance Ministry since February. Its real effective exchange rate, measured against the currencies of Russia’s major trading partners and adjusted for inflation, appreciated about 5 percent in the year to date through May, central bank data show.

Each industry has its own “comfort level” for the ruble, according to Manturov. For some companies in pharmaceutics, it’s about 50 against the dollar, while makers of fertilizers prefer it near 70. The currency was trading just below 57 in Moscow on Friday.

“Every extra ruble in the exchange rate means additional operational revenue for exporters selling their products in dollars,” Manturov said. “The bigger the devaluation, the better.”

The positive effect of import substitution is actually “wearing off,” according to Sergey Tsukhlo, a department head at the Gaidar Institute for Economic Policy, whose polls show manufacturers prefer a stronger ruble at 52 against the dollar to buy equipment from abroad. Among non-food products, imports now account for as much as 52 percent of the total, near the highest readings since 2010, Alfa Bank estimates.

Stingy Stance

Monetary policy has done little to ease the pressure on the ruble. The central bank has been stingy with rate cuts, delivering only two so far this year after two in 2016. 

For the Bank of Russia, a stronger ruble is an advantage because it drives down the cost of imports. Its appreciation explains 70 percent of the slowdown in inflation since the start of 2017, according to Alfa Bank. Reductions of 25 and 50 basis points in the central bank’s 9.25 percent benchmark will be under consideration at a meeting next week.

“We are glad that inflation in Russia has declined to a record level, opening the prospect of lowering the key rate,” Manturov said. “We can’t wait for these actions. Rate decreases will result in a slight depreciation of the ruble.”

— With assistance by Andrey Biryukov

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