5 Questions About Ruble

The ruble is at a new historical minimum – one dollar is exchanged for more than 82 rubles. RBC tries to understand, how it will affect prices, incomes and budget.

Yesterday the ruble updated its record minimum: in the afternoon the exchange rate of the dollar on the Moscow Exchange passed the level of 82 rubles. The previous record was registered on December 16, 2014, when it reached 80.1 rubles. The ruble, which has depreciated since the beginning of 2014 by almost 60%, continues to fall after the oil, which is now trading near $27 per barrel (Brent futures for March). But there is no panic in the currency market, unlike it was in December 2014. Since November 2014 the Central Bank follows the policy of a free-floating ruble, and emergency intervention is not foreseen, especially as today the Head of the Central Bank, Elvira Nabiullina, called the exchange rate close to being ‘fundamentally reasonable’.

How the fall of the ruble would influence prices and incomes?

The influence of ruble devaluation on inflation will be determined by how long the ruble will stay at the new level, explains Chief Economist at ING in Russia and CIS, Dmitry Polevoy. ‘If we stay at this level for several months, it will have an impact on inflation – within the framework of evaluations that have always been: a 10% weakening of the currency leads to approximately one additional percentage point of inflation,’ said the expert.

A similar assessment gives Chief Economist at VTB Capital in Russia and CIS, Alexander Isakov: 10% weakening of the ruble is transferred in about 1.2 percentage point of additional inflation. The government proceeds from the inflation forecast of 6.4% by the end of 2016 (after nearly 13% last year).

Possible increase in inflation provokes questions about how realistic it is for the Central Bank to achieve the stated purpose of keeping an inflation at 4% in 2017. ‘There are tools for this, but the question is how tough is the policy that the Central Bank is ready to carry out,’ says Isakov. The main tool of the Central Bank for inflation targeting is the interest rate, which now stands at 11%. But the First Deputy Chairman of the Central Bank, Ksenia Yudaeva, recently assumed that the interest rate might grow in case of increased inflationary pressure on the economy.

According to Isakov, the Bank of Russia under certain conditions may, without changing the stated purpose (4%), move it in time, at a later date. Before the Bank stated a specific year of transition to the 4% inflation, it operated on medium-term guidelines.

Inflation affects the real incomes of the population. At the same time, the nominal income is unlikely to be reduced, says Isakov. ‘I think, the diversity of revenue growth for different sectors, which we have seen in the past year, will remain,’ he says. ‘We can expect that in tradable sectors – those that compete with imports or work for export – may remain fairly high level of wage growth. Last year it was from 7 to 13% in different sectors.’ In other, non-tradable sectors, such as the financial sector or public administration, regardless of the growth rate of wages, will be quite restrained, said the expert.

‘We have no drivers and factors due to which incomes may start to grow,’ objects Polevoy of ING. ‘At best, they will remain unchanged in nominal terms, or would grow just a little bit. At worst, in nominal terms, incomes would start to fall if the reduction in nominal wages starts in one form or another,’ he said.

What will happen to the currency debts of companies?

According to the Bank of Russia, sanctions, which closed foreign borrowing markets for Russian companies, helped to reduce the external corporate debt in foreign currency from nearly $500 billion at the beginning of 2014 to $418 billion in the middle of 2015. In October 2015 Moody's rating agency, after analyzing the liquidity of 57 rated companies of non-financial sector, concluded that 84% of them has enough liquidity to repay debts with maturity before the end of 2016, without recourse to additional external borrowing. For the implementation of the obligations these companies have enough existing cash reserves and operational cash flow, as said in the review.

Almost all exporters have an adequate ratio of foreign currency debt to foreign exchange earnings, notes BCS Prime Debt Analyst Artem Usmanov. But companies vulnerable to the devaluation of the ruble are companies focused on the local market, with high levels of foreign currency debt, such as Transneft, Pipe Metallurgical Company (TMK), and Brunswick Rail. ‘They have a large amount of foreign currency debt at a predominantly ruble revenues,’ said Usmanov. In the first nine months of 2015 the share of proceeds of Russian TMK divisions in rubles amounted to 75%, and foreign currency debt – 64%. During the same period, Transneft had 100% of its revenue in rubles, and foreign currency debt – 75%. Brunswick Rail had a currency debt of more than 87%, while its revenue is mainly in rubles.

Senior Portfolio Manager at GHP Group, Fedor Bizikov, agrees with him. ‘TMK has a high debt load – loans and Eurobonds. TMK's total debt amounted to $2.8 billion on September 30, 2015. Of these, in 2016, the company has to pay 14 billion rubles and $80 million,’ he recalled.

According to Bizikov, with a sharp rise of the dollar, losing are those companies that need to buy imported equipment. For example, telecommunications companies need equipment for the construction of cellular networks, which is not produced in Russia. In general, in the current economic environment, companies are trying to reduce investments and slow down the pace of business growth. On the commodities market, at least one third of the volume produced is sold abroad, and thus the negative effect is lesser.

Will the government have enough money?

In the context of falling oil prices, the budget offsets part of the shortfall of oil exports revenue due to the devaluation of the ruble – this is the natural mechanism of oil revenues ‘adjustment’. It is interesting that a week ago the Minister of Economic Development, Alexey Ulyukaev, said that the government is considering a ‘stress’ version with the oil price at $25 per barrel (Russian brand – Urals) and the dollar at 80 rubles and above – the budget deficit in this case may rise to 7-7.5% of GDP. Wednesday, January 20, is just a good illustration of this scenario: the dollar is worth more than 80 rubles, and the Russian Urals – about $25.

According to the calculations of the Economic Expert Group (EEG), at an oil price of about $27-28 per barrel, an average dollar exchange rate should be at the level of 83-84 rubles (this is above the maximum exchange rate values, which are reached by the dollar today). ‘Sanctions pressure virtually disappeared. And now the main factor of pressure on the Russian currency is the oil price,’ says Head of International Economics Department at EEG, Ilya Prilepsky.

When calculating the budget, the basic factor is also the oil price. According to the calculations of EEG, with an average annual oil price of $35 per barrel, the budget deficit will amount to 5.5% of GDP (in the absence of actions to reduce costs), which is significantly above the level of 3% of GDP, to which President Vladimir Putin instructed to limit the deficit. In this case, an average annual dollar exchange rate would amount to 82-83 rubles. And at $30 per barrel, a potential deficit would amount to 6.8% of GDP, the dollar – 89 rubles. Such calculations were named by the Head of Fiscal Policy Department at EEG, Alexandra Suslina.

At the same time, according to the EEG's predictions, an average annual oil price in the current year would be $33-34 per barrel, at this price the equilibrium dollar exchange rate would amount to 73-74 rubles, adds Prilepsky.

What would happen to the banks?

Such stressful situations in the financial market, as we see now, will have a negative impact on the banking sector, which is why the revoking of licenses for economic reasons is likely to happen more often, suggests the Deputy CEO of the S&P's ‘Ratings of Financial Institutions’ Group, Sergey Voronenkov. Economic reasons are primarily the lack of liquidity and the lack of capital. The last is also important because last year the Central Bank allowed banks to use the discount rate in the calculation of regulatory requirements, including the capital adequacy ratio, which has given banks the opportunity to postpone the problems. At first, the rate for banks was about 40 rubles per dollar, then – 45 rubles, and since October – 55 rubles, recalls the Director of Financial Institutions at Fitch, Alexander Danilov.

But since the beginning of the new year, these exemptions have been ceased to operate and, therefore, in reports on February 1 we will see the real situation. Banks that used a reduced rate may lose 1-1.5 percentage point of capital, Danilov thinks. As of January 1 the average capital adequacy in the banking system was about 11%. Low capital adequacy will limit the ability of banks to lend to the economy. In addition, the Association of Regional Banks ‘Russia’ considers that the abolition of exemptions would lead to violation of mandatory standards or their achievement of critical values by more than 25% of banks (this conclusion is based on a survey of banks that are members of the association). On the other hand, banks' capital will be eroded by perishable loans. Even if a borrower takes a loan in rubles, his business may experience difficulties due to the devaluation and shrinking demand, which means that he can, for example, stop paying on the loan. Only for foreign currency loans the delay due to the devaluation may increase by 5%, says Senior Analyst at NRA, Maxim Vasin.

The lack of liquidity may arise due to the fact that the population will begin to take away deposits, because people will have to spend more due to rising prices and cuts in real wages. Moreover, in times of crisis often occur emotional ‘raids’ of depositors to the various banks, for example, against the background of rumors, which also deprives the liquidity of banks. And if a bank can work, as shown by the example of Svyaznoy bank (which was working about a year with an improper capital adequacy ratio) without capital, the liquidity outflow leads to bankruptcy rather quickly.

What can the government do?

Now the government may implement the same measures as in early 2015, after which the ruble began to strengthen, says Chief Economist at PF Capital, Evgeny Nadorshin. For example, it may be required from the exporters to sell currency earnings at a certain schedule. Also, we can already observe the additional soft constraints on capital transactions. The anti-offshore process is launched, operations with individual foreign accounts are limited, the government wants to start a fine for non-residents loans under certain conditions, lists the economist. All this may well limit the demand for foreign currency, he sums up.

At the same time, according to Gazprombank Analyst Egor Susin, there is no critical level of ruble devaluation, at which the Central Bank and the government would began to take emergency measures. It must be a situation in which the exchange rate would drastically depart from the dynamics of oil prices and generate increased inflationary risks.

The current decline in the ruble exchange rate is due to the oil price dynamics, and now it is the short-term dynamics, says Susin. Oil price is trying to find its bottom, the volume of speculative positions on oil is greatly reduced, and now the government and the Central Bank would not accept any drastic steps, he reckons. ‘The current dynamics is short-term, it does not cause any panic in the financial market. Sudden movements of the Central Bank may lead to a more negative effect, provoke an increase in pressure on the ruble,’ warns Susin.

RBC, 21/01/2016