Russian President Putin.
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Russia believes it has averted a financial crisis as its currency recovers and economic data improves, but strategists say the numbers hide some bad truth for Moscow. .
Although domestic inflation is heating up, there are signs that price growth is slowing and will continue to do so, while Ruble has gone from an all-time low in March to be the world’s best performing coin this year.
Meanwhile, indicators of economic activity are improving and Russia has so far managed to avoid defaulting on foreign currency debt, despite Western sanctions that froze large amounts of its reserves.
Russia’s inflation hit a two-decade high of 17.8% year-on-year in April, up from 16.7% in March, but the pace of price growth is starting to show signs. slow down. Consumer price growth slowed sharply from 7.6% in March to 1.6% in April, and prices of non-food goods increased only 0.5%, compared with 11.3% in March.
Further gains in the coming months are expected to be modest, and the market favors Central Bank of Russia further easing the emergency rate hike, possibly cutting 200 basis points in June.
It comes after the CBR made an emergency rate hike that took the country’s key interest rate from 9.5% to 20% at the end of February, days after Russia’s unprovoked invasion of Ukraine, in attempt to rescue the ruble. The central bank was able to move interest rates to 14% as inflation and currency prospects improve, and Capital Economics sees further changes ahead.
“Today [inflation] The figures will further support the central bank’s assessment that the acute phase of the crisis in Russia is over,” emerging markets economist Liam Peach wrote in a note last week.
“It’s possible that consumer prices rose less than 1% month-on-month overall in May and headline inflation will eventually peak at just under 20% later this year.”
Resilience in rubles
The price increase slowed down following a sharp increase in the price of rublethereby reducing import prices.
As of Tuesday morning in Europe, the ruble is trading at just over 62 against dollarsfell to an all-time low of $150 on March 7, after the announcement of a series of international sanctions in response. Russia Invades Ukraine.
Despite the dollar’s broad strength, thanks in part to its safe-haven status amid risk aversion in global markets, the greenback fell nearly 17% against the Russian currency. to the present time.
Tight capital controls from Russia’s central bank – including ordering companies to convert 80% of their foreign currency earnings into rubles – have helped revive the ailing currency. The Kremlin also initially banned Russian citizens from transferring money abroad, and remittances are now capped at $10,000/month for individuals until the end of 2022.
“Russian economy continues to recover from initial shock in late February and early March,” Goldman economist Clemens Grafe wrote in a note earlier this month. “Financial stability concerns are fading, the ruble has strengthened back to early 2020 levels.”
However, for many analysts, Moscow’s actions to protect its currency are tantamount to manipulation, in which demand has been created that would otherwise not exist and the controls which effectively turned the ruble into a “managed” currency.
Charles-Henry Monchau, Investment Director at Switzerland-based Syz Bank, suggests that although Russia’s central bank has deployed a range of tools to make the ruble look valuable, it is very Few people outside of Russia “want to buy a single ruble unless they absolutely”. must “and merchants” no longer consider the ruble a free-trade currency. “
“If Russia succeeds in finding a solution to the Ukraine problem with the consequences of lifting sanctions and restoring trade relations with the West, then the ruble is likely to retain its current value,” he said. .
“On the other hand, if the measures are withdrawn without a solution, the ruble could collapse, leading to a domestic inflation boom and a deep economic recession in Russia.”
And Russia has also taken another measure to strengthen its currency. The CBR continues to buy gold on the domestic metal market after a two-year absence, hoping to store value to protect Russia’s wealth against inflation in the event of a further shock in foreign exchange liquidity.
“Another strong move that has gone relatively unnoticed in the Western media: The Central Bank of Russia continued to buy gold at a fixed price of 5,000 rubles per gram between March 28 and March 5. June 30,” Syz Bank’s Monchau said.
When gold is traded in US dollars, Monchau notes, this allows the CBR to link the ruble to gold and set a floor for the ruble in dollar terms. As a result, a further appreciation of the ruble could boost the price of gold, and Russia has been accumulating the precious metal rapidly since its annexation of Crimea in 2014, which is now the fifth largest stockpile in the world.
The move thus provides further protection for the Russian economy against liquidity constraints caused by other sanctions and the depletion of the country’s foreign currency reserves to service its debt-denominated currencies. dollars.
Economic indicators of the closely watched Purchasing Managers’ Index are also showing some improvement.
After falling from 48.6 in February to 44.1 in March – with readings below 50 indicating a contraction – April’s figures rose to 48.2. This is mainly due to improved output and shorter delivery times from suppliers, according to Goldman Sachs.
Goldman’s Grafe noted: “Russia’s financial conditions have improved mainly due to narrowing CDS (debt-to-debt swap) spreads as Russia pays principal and interest on Eurobonds in USD,” Goldman’s Grafe notes. idea.
Russian success make payments to holders of two sovereign bonds in Russian dollarsdue in 2022 and 2042 and worth a total of $650 million, before the end of the 30-day grace period on May 4. However, Analysts still warn of a high probability of Russia defaulting on its debt within the next two years.
Temporary victory
The collective improvement in the data has led Russian President Vladimir Putin to declare that the West’s “lightning economic war” – aka the “lightning war” – has failed.
However, while Russia appears to have weathered the impending economic fallout, the long-term outlook is less optimistic, given the direct impact of the mitigation measures and the threat of such measures. Further sanctions remain.
A recent survey by the Central Bank of Russia of more than 13,000 businesses showed that many businesses had difficulty importing goods into the country.
Car parts, packaging and microchips, and shortages of raw materials are forcing some companies to suspend factory operations or look elsewhere for resources, the survey found. shows.
Meanwhile, Elina Ribakova, deputy chief economist at the Institute of International Finance, told the BBC last week that “superficial” economic indicators would mean nothing to realists, where security Job security remains ambiguous for many Russians.
She told Grid News in a separate interview this week: “This year we will see the effect on the Russian economy as companies start to run out of parts or equipment and have to start lay off employees or put them on unpaid leave.
