By Pyotr Rushailo and Pavel Chuvilyaev
On January 19, Prime Minister Putin instructed the ministry of finance to revise the 2009 budget, proceeding from the average oil price of $41 per barrel and the dollar exchange rate of 35 roubles for one dollar. Despite the fact that even these estimates appear too optimistic, the rouble started to appreciate against the dollar in the foreign exchange market last week. Some experts even believe that a new economic and currency policy has been launched in the country.
TRUE RATE
The Government meeting on January 19 started with Minister of Economic Development Elvira Nabiullina reporting on the clarified parameters of the country's socioeconomic development forecast for 2009. "The average price of oil in 2008 was $94.4, whereas during the first 16 days of January, the average oil price amounted to $42.9 per barrel and continues to fluctuate. Therefore, we believe that the base price should be set at $41 per barrel," she said. Prime Minister Putin, whose expression grew increasingly sombre as he was listening to the report, reacted: "the Ministry of Finance will need to introduce appropriate changes into the 2009 federal budget, reflecting the oil price of $41 per barrel."
The 2009 budget, adopted on December 1, 2008, set the average oil price for the year at $95 per barrel. At the time, many experts did warn that the price was overly optimistic (see 2008 Dengi Nos. 42, 46, 48, and 50). Now, it will need to be reduced more than twofold, based on Mr Putin's instruction.
Many analysts even believe that the more realistic assessment of the economic situation by the Government represents a "new course". Compared to the overly optimistic expectations of the "Programme 2020" and similarly ambitious programmes, the Government appears to act more in line with reality.
The return to realism, however, will hardly be easy. Oil is the crucial revenue source for the budget, and reducing the base oil price will result in a budget deficit. According to the new economic parameters approved by Prime Minister Putin on January 19, the oil price will be set in the budget at the rate of $41 per barrel; inflation - at the rate of 13%; the GDP - at the rate between 0% and 2%, the dollar exchange rate - at 35 roubles for one US dollar; and the budget deficit - at the rate of 5% of the GDP or 1.4 trillion roubles.
It appears that the Presidential Executive Office is so far more optimistic about the state of the country's economy than the Government is. Arkady Dvorkovich, an advisor to the President, said on January 20 that inflation would amount to 12% to 13% and the budget deficit would constitute 3% to 4% of the GDP. As for the rouble's exchange rate, Mr Dvorkovich told the Reuters news agency that "the considerable rate adjustment is coming to an end, and in the future, the rouble's fluctuations will not be as drastic."
However, there are more pessimistic scenarios as well. On January 19, the Centre for Macroeconomic Analysis and Short-term Forecasting released its basic forecast, according to which the average oil price will amount to $32 per barrel; the inflation will stand at 15%; the GDP will decrease by 3.1%; the US dollar will cost 40 roubles; and exports will be reduced twofold. The UN economic development report in relation to Russia, released in May, will be based on the Centre forecast.
MANAGERIAL DECISION
It should be noted that since the beginning of the economic downturn, Russian authorities have more than once expressed excessive optimism about the strength of the national currency. On October 29, 2008, for example, the same Mr Dvorkovich said that "despite rate fluctuations, the rouble would remain strong." Back then, the exchange rate was 27.4 roubles for one US dollar.
On December 25, Mr Dvorkovich said that the average USD exchange rate in 2009 would be "between 31 and slightly less than 32 roubles." Elvira Nabiullina, in her turn, was predicting at the December 17, 2008 meeting, convened by the President that the average USD exchange rate in 2009 would stay between 30.8 and 31.8 roubles. Also, on December 27, 2008, Russian Finance Minister Alexei Kudrin told the TV channel Vesti that the rouble's exchange rate in 2009 would be estimated at the level of 31 to 32 roubles for one US dollar.
Last week, the Government's statements were confirmed by the positive market dynamics - the rouble was appreciating quite rapidly for the first time since the beginning of the recession. On January 20, the dollar lost more than 60 kopeks in value at the Moscow Interbank Currency Exchange (MICEX). The official Bank of Russia exchange rate on January 21 was 33.42 roubles for $1 (the Bank of Russia rate for a certain date is set in the first half of the day of the previous trading day), whereas already on January 22, the rate was 32.64 roubles for $1.
Market players believe that this could mean the end of the "controlled devaluation" period and the beginning of the rouble's appreciation. Their logic is largely understandable. As a result of the large-scale currency purchases by the market participants over the recent weeks, there was a shortage of roubles in the market. The shortage became critical at the end of January, prior to the planned tax returns to the budget. Considering that large currency volumes were supplied to the market by the Bank of Russia through its unsecured auctions and repo agreements, all that was required to force the market players to exchange their currency reserves was to slightly reduce the currency supply to the market. This would have appreciated the rouble, and simultaneously punished the speculators, playing against the Russian currency.
In the short-term, this hypothesis sounds quite reasonable, and it is possible that the rouble will continue appreciating until the end of the month. In the long-term, however, things are not as simple.
Let us analyse the Bank of Russia's currency policy from the beginning of the crisis. The Bank's decision to devaluate the rouble gradually was intentional, even though, to prevent capital flight, it would have been more reasonable to devaluate the currency in one swift and sharp move. This would have brought the rouble to the "equilibrium" level; in other words, to the level, corresponding to the current ratio of exports, imports, and currency movements at the time of falling oil prices.
The Bank of Russia probably wanted to allow the Russian companies that owed large amounts to western banks (most debtors are state and quasi-public companies) to buy foreign currency relatively cheaply.
By the New Year, all those who wanted (or were able) to buy currency probably already bought it, and, therefore, the Bank of Russia proceeded with more rapid devaluation. Once the "equilibrium" level was passed, the Bank reversed the dynamics towards the rouble's appreciation to force the speculators from playing against the rouble, to stabilise the market, and to sustain the rate around the "equilibrium" level, which does not require spending currency reserves. It appears that this is exactly what the Bank has done.
However, the problem is that the "equilibrium" rate (regardless of the methodology used by the Bank to determine it) is based on the ratio of exports and imports. The latter are subject to change, irrespective of the Bank's resolve. Therefore, in the medium term, the rouble's exchange rate will be largely determined by the revenues accrued from exports of oil. The price of the latter mostly depends on the demand, that is, on the growth potential of the world economy. Judging from the ongoing sharp decline in the world stock markets, the recovery of the world economy in the near future is unlikely, market participants say.
Even though the imports growth rate has been sharply decreasing, according to the Bank's latest data, it cannot compensate for the significant reduction of oil revenues. This means that it is too early to declare the "end of the controlled devaluation period" and the "beginning of stabilisation." The rouble's exchange rate will continue to depend on the price of oil. The only positive development is that, possibly, there will be no sharp rate fluctuations in market, like those in the second half of January.
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DIRECT SPEECH
Do you believe in the new course?
Alexander Osin, chief economist, Finam Management
In my opinion, the country's leadership is hoping that the crisis will soon end, which will help avoid social tensions in Russia. Currently, the forecasts mostly point to the beginning of economic recovery in the US, and later in other major world economies towards the end of 2009 and in 2010.
Therefore, the main goal of the Government is to wait out the crisis. I will not comment on whether this is a right or wrong strategy to take. More ambitious approaches are possible, such as economic restructuring versus supporting individual companies and turning them into zombies. The Government has chosen the easiest and the most risk-free approach, giving preference to minimising tactical losses while disregarding possible strategic gains.
It is essential that the effects of the macroeconomic stimulus measures are realised before the emergence of inflation processes in the economy, caused by such measures. The Ministry of Economic Development forecasted an oil price (Urals brand) of $41, as well as the prognosis for the GDP dynamics, and the dollar rate to the rouble is the most in-line with the policies of the new US administration and OPEC's energy sector support measures.
Nikolai Kashcheyev, analyst, MDM Bank
It seems like the Government has been saying recently that "enough is enough - we have given you not only ample time to get ready for the rouble devaluation, but also an opportunity to make some money on short rouble positions; we have now covered most of the distance, and are ready to introduce an equilibrium rouble rate very shortly." Of course, the "equilibrium rate" is more subjective in a controlled market than in an open one. Still, we do need to get the Government's signals right. If our understanding is correct that the Bank of Russia is planning to set an "equilibrium rate" at the time when the rouble liquidity is decreasing, and there are certain indexes that the Bank was secretly trying to achieve, then now is the time when we should (or are obliged to, more accurately speaking) at least stop playing against the rouble and wait for new signals from the regulator.
The monetary authorities have signalled that the current stage of the devaluation has come to a certain threshold. It is possible they hold the belief that the damage to the currency reserves, caused by the gradual devaluation, has been too excessive, while some of its goals have already been accomplished. Simultaneously, the liquidity of the banking system has sharply decreased, thereby limiting the speculators' ability to play against the rouble. Still, there are very few reasons to believe that the rouble's devaluation has stopped completely; even if the oil price stays at the rate of $40 per barrel, it is still insufficient to change the overall state of the economy. Obviously, the country's budget deficit will keep growing (possibly to over 8% of the GDP or about 2.2 to 2.5 trillion roubles), whereas foreign investments are unlikely to resume.
Andrei Kabanov, analyst, Adekta
The Bank of Russia has done everything possible to cause a rouble shortage in the market, which has led to the interest rate increases and has eventually resulted in the appreciation of the rouble. The President's economic advisor Arkady Dvorkovich previously mentioned that the policy of the rouble's gradual devaluation could come to an end. It is possible that the Government has decided to end this policy. According to unofficial sources, at a meeting at the Bank of Russia, large banks were told that the "controlled devaluation" was to stop. The rouble shortage prior to tax payments has helped the national currency. The speculative trade has also contributed to rouble's appreciation. As a result, we are getting "out of the frying pan and into the fire." If in the past experts were predicting a rapid devaluation of the rouble, now they are suggesting an appreciation, and, possibly, a deep one. The Bank of Russia has also stated that it was not going to limit the rouble's appreciation.
Inga Foksha, analyst, Aton
In the last week of January, there will be a significant rouble outflow from the banking system. Besides the monthly payments of excise tax, mineral extraction tax, and the advance payment of income tax, the banks will need to repay 234 billion roubles of unsecured loans plus interest. The banks will not be able to refinance these loans through unsecured auctions, as the Bank of Russia has reduced the volume of such operations. As a result, they will face a rouble liquidity shortage and will most likely sell some of their foreign currency reserves to repay the rouble debts to the budget. This, in turn, will result in the rouble's appreciation.
The situation will somewhat stabilise in the first half of February, due to the absence of large-scale repayments, and provided that the oil prices continue to decrease. We expect a corrective movement of the rate towards depreciation, which, however, will not last. In the second half of February, the banking system will need much more rouble resources than in the end of January. Just the loan repayments owed to the Bank of Russia and the Housing and Utility Fund are in excess of 500 billion roubles. With the tax payments, largely due in the end of the month, the debts will total over a trillion roubles. The currency sales will resume even on a larger scale, which will inevitably result in the rouble's appreciation.