Two-thirds of Russian firms want a stronger ruble

Two-thirds of Russian firms want a stronger ruble
Two-thirds of Russian firms want a stronger ruble. / bne IntelliNews
By Ben Aris in Berlin July 26, 2017

​Russia’s currency is in the focus as the economic recovery gathers pace and the ruble’s value against the dollar is growing in importance just as the exchange volatility soars.

Two-thirds (66%) of enterprises in the Russian manufacturing sector think that a stronger ruble will improve their profits, according to an annual survey conducted by the RBK newspaper together with Deloitte in April-May of this year. Only 18% of the 80 companies surveyed said the FX rate would have no impact on their work.

And the ruble has been steadily strengthening. In 2016, the average exchange rate was RUB66.9 to the dollar and in the first half of this year that rose to RUB58.2, according to the Central Bank of Russia (CBR). To remind, the ruble was about RUB35 to the dollar prior to the massive devaluation at the end of 2014, caused by the collapse of oil prices, when the exchange rate fell briefly to RUB80.

 

 

Russians have always been savvy when it comes to exchange rates, especially having lived through several years of hyperinflation when holding dollars became essential. And the currency has become more volatile since the CBR took the historical step of freeing it in 2014. Since then, thanks to Russia’s twin trade and currency account surpluses, the state has had the ammunition to control the exchange rate somewhat.

But in the second quarter of 2017 the currency account was negative for the first time in years at -$300mn compared with a whopping $23bn surplus the quarter before. As the current account is essentially flat that means even small changes in the flow of capital into and out of Russia can now have potentially large effects on the ruble/dollar exchange rate.

Putting all that aside, the survey found that most businesses see a rate of RUB52 as optimal, but a lot depends on which sector you are looking at. Pharmaceutical companies, which rely heavily on imports, want RUB42 per dollar, while exporters like metallurgical and chemical enterprises say the optimal rate is RUB61 and RUB59 respectively. Light industry and food processors, which both source their inputs domestically and sell on the home market, say that RUB48-RUB49 would suit them best.

The weakness of the ruble in 2016 hurt many Russian businesses and led to an increase in the cost of production, reported 40% of the respondents. Despite two decades of business, many Russian firms have still not found cheaper or equivalent quality inputs and continue to rely on imports for many key elements of production. The irony is that the overly strongly ruble during the boom years – inflated by the huge amounts of inbound petrodollars – stymied the development of business as it was far cheaper and easier to import inputs than set up domestic production of the same.

During the weakest months of ruble value in 2016 the companies that were hurt the most were foreign companies (70%) and manufacturers of metal products (46%). Another quarter (24%) of respondents said that the depreciation of the ruble did not affect their business activity – mostly from the automotive, aircraft and shipbuilding industries (43%).

Of course one man’s pain is another’s gain and the exporters did handsomely out of the weak ruble: a third (31%) of companies from the chemical industry reported an improvement in their competitiveness abroad during this period, but this was mitigated by the increase in the cost of production, which affected a similar number of companies.

The government has latched onto the idea of a weaker ruble as the way to solve Russia’s economic woes, although it has stopped short of applying administrative methods to get its way, leaving the CBR’s independence alone so far.

The official position is those sectors the government wants to promote to substitute imports, like food processing and agriculture, would be best served with the exchange rate at RUB62 to the dollar, or at least in the range RUB60-RUB65, according to Minister of Industry and Trade Denis Manturov.

The ruble has been trading at close to that level and was 59.92 at the time of writing on July 25, but it has weakened recently on the back of weaker oil prices in the last months.

However, a study made in May by the CBR found that only three sectors would be hurt by a strong ruble: rubber and plastic production, leather production and woodworking – none of which are particularly important to the Russian economy.

On the other hand, the CBR found the big winners from a strong ruble are: textiles, chemical production, transport, equipment, several of which are important and transport stands out as a big winner, according to the regulator.

As an aside, the survey also found that the vast majority of firms (79%) are looking to the government for financing and the economy as a result remains very dependent on the state. Last year, the Federal Antimonopoly Services (FAS) found that the state’s share in the contribution of the state and state-owned companies to GDP had doubled year-on-year to 70%.

 

 

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