As inflation slows and the ruble strengthens, Russia hopes to avoid a financial crisis

As inflation slows and the ruble strengthens, Russia hopes to avoid a financial crisis


Russian President Vladimir Putin.

Swimming pool Reuters

Russia believes it has avoided the financial crisis as its currency rallies and economic data improve, but strategists say the figures obscure some ugly truths for Moscow.

Although inflation in the country is rising sharply, there are signs that price growth is slowing and will continue to do so, while the Russian ruble has moved from a historic low in March to the world’s most powerful currency.

Meanwhile, indicators of economic activity are improving and Russia has so far managed to avoid defaulting on foreign currency, even as Western sanctions have frozen large parts of its reserves.

Russia’s inflation peaked in two decades in April, at 17.8% year on year, up from 16.7% in March, but price growth is beginning to show signs of slowing. Consumer price inflation slowed sharply from 7.6% in March to 1.6% in April, and non-food prices rose by only 0.5% from 11.3% in March.

Further increases are expected to be modest in the coming months, and the market is encouraging the Russian central bank to continue to ease emergency rate hikes, possibly by a reduction of 200 basis points in June.

It comes after the CBR introduced an emergency rate hike that in late February, a few days after the unprovoked Russian invasion of Ukraine, raised the country’s main interest rate from 9.5% to 20%, in an effort to save the ruble. The central bank has since been able to move the rate to 14% as the inflation and currency outlook have improved, and Capital Economics sees further changes.

“Today [inflation] The figures will further support the central bank’s assessment that the acute phase of the Russian crisis has passed, “wrote Emerging Markets economist Liam Peach last week.

“It is possible that consumer prices as a whole will rise by less than 1% m / m in May and that headline inflation will end at a peak just below 20% by the end of this year.”

Ruble resistance

The slowdown in prices follows the sharp appreciation of the ruble, which in turn reduces import prices.

The ruble has traded at just over $ 62 a dollar in Europe since Tuesday morning, falling to a historic low of $ 150 on March 7 after a series of international sanctions were announced in response to the Russian invasion. Of Ukraine.

Despite the broad strength of the dollar, partly due to its perceived safe harbor status amid risk aversion in global markets, the dollar fell almost 17% year on year against the Russian currency.

Russia’s central bank’s tight capital control measures – which include orders for companies to convert 80% of their foreign currency earnings to rubles – have helped revive a sick currency. The Kremlin also originally forbade Russian citizens to transfer money abroad, and transfers are now limited to $ 10,000 per month for individuals until the end of 2022.

“Russia’s economy continues to recover from the initial shock in late February and early March,” Goldman economist Clemens Grafe wrote earlier this month. “Concerns about financial stability are fading, the RUB has strengthened back to early 2020 levels.”

For many analysts, however, Moscow’s actions in defense of its currency amount to manipulation, because demand was created that would not otherwise exist, and capital controls effectively turned the ruble into a “managed” currency.

Charles-Henry Monchau, chief investment officer at Switzerland’s Syz Bank, suggested that while Russia’s central bank has put in place a number of tools to make the ruble look valuable, very few people outside Russia “want to buy a single ruble if they absolutely must” and traders “already does not see the ruble as a free trade currency “.

“If Russia manages to find a solution to Ukraine’s problem as a result of lifting sanctions and resuming trade relations with the West, the ruble could potentially retain its current value,” he said.

“On the other hand, if the measures are withdrawn without a resolution, the ruble could collapse, which would result in an explosion of domestic inflation and a deep economic recession in Russia.”

And Russia has also taken further steps to support its currency. After a two-year absence, the CBR resumed gold purchases on the domestic metals market in hopes of saving value to protect Russia’s wealth from inflation in the event of another foreign exchange liquidity shock.

“Another strong step remained relatively unnoticed in the Western media: the Russian bank resumed purchases of gold at a fixed price of 5,000 rubles per gram between March 28 and June 30,” said Monchau of Syz Bank.

As gold is traded in US dollars, Monchau noted that this allows the CBR to link the ruble to gold and set a minimum price for the ruble in dollar terms. Further growth of the ruble could therefore increase the price of gold, and since the annexation of the Crimea in 2014, this precious metal is rapidly accumulating and now boasts the fifth largest stock in the world.

The move therefore offers further protection for the Russian economy from liquidity constraints resulting from further sanctions and a deterioration in the country’s foreign exchange reserves to service dollar-denominated debt.

The closely watched Purchasing Managers’ Index also shows some improvement.

After falling from 48.6 in February to 44.1 in March – with values ​​below 50, which indicates a contraction – the April data rose to 48.2. According to Goldman Sachs, this was mostly due to better performance and shorter delivery times for suppliers.

“Russia’s financial conditions have improved mainly due to narrowing credit default swaps (CDSs) as Russia has repaid principal and interest on USD Eurobonds,” Goldman’s Grafe said.

Russia has successfully made payments to holders of two Russian government bonds denominated in dollars, due in 2022 and 2042 and totaling $ 650 million, before the end of the 30-day grace period on May 4. However, analysts still warn that there is a high probability of Russian failure over the next two years.

Temporary victory

A joint improvement in the data led Russian President Vladimir Putin to claim that the “economic blitzkrieg” – or “blitzkrieg” – had failed.

Although Russia appears to have averted impending economic collapse, the longer-term outlook is less optimistic, as the knock-on effects of mitigation measures and the threat of further sanctions remain at stake.

A survey by Russia’s central bank among more than 13,000 companies recently revealed that many of them were already having problems importing goods into the country.

These included automotive parts, packaging and microchips, and a shortage of raw materials forcing some companies to suspend plant operations or look for resources elsewhere, the survey found.

Meanwhile, Elina Ribak, deputy chief economist at the Institute for International Finance, told the BBC last week that “superficial” economic indicators would mean nothing to many Russians for those in the field where job security is still blurred.

“We will see an impact on the Russian economy later this year as companies begin to run out of parts or equipment and have to lay off people or put them on unpaid leave,” Grid News told a separate interview this week.

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