This year Russian exporters have been hit by "Kudrin’s scissors," losses caused when time passes between the moment revenue is received in foreign currency and the payment of taxes associated with that revenue.

The problem is that this year the ruble has strengthened significantly against the dollar and if the gap is too long, exporters can lose a lot of money just from the change in value of the currency, Vedomosti reported on July 13.

The ruble has strengthened but US President Donald Trump’s Liberation Day trade war has also seen the dollar weaken by around 6-8% year-to-date.

The depreciation of the US dollar is typically a net positive for emerging markets (EMs), particularly for those with pre-existing balance sheet vulnerabilities. But despite the potential for a virtuous cycle – where a weak dollar eases debt burdens and spurs capital inflows – Gabriel Sterne, head of Global Emerging Market Research at Oxford Economics, cautioned in a note that such a cycle is not yet clearly established.

“A weaker dollar boosts liquidity and dampens vulnerabilities in dollar-exposed balance sheets,” Sterne explains. “It also strengthens activity, and generates risk-on sentiment, which in turn reinforces the cycle of strength in demand for EM assets.”

Volatile ruble

The ruble has had a very volatile year. The change in value has been driven by the cost of the war, high inflation and big swings in oil prices.

In the first quarter, the ruble weakened dramatically. Starting the year near RUB89 to the dollar, it slid past RUB92 by mid-March, due to seasonal pressure from higher import demand and subdued oil prices. Brent crude traded below $80 per barrel for much of the period, reducing foreign currency inflows from energy exports that undermine the ruble.

The second quarter saw a reversal, with the ruble strengthening sharply to below RUB87 by late June. The appreciation was driven by seasonal factors such as lower import demand, stronger-than-expected oil revenues and the ongoing effects of the Central Bank of Russia’s (CBR) restrictive interest rate policy with the key rate at 16%, attracting inflows into ruble-denominated instruments that supported the currency. Additionally, the so-called budget rule triggered foreign currency sales as Urals crude prices dipped below the $60 threshold.

Preliminary data for the third quarter show the ruble holding firm in early July, trading in the RUB86-88 range. Analysts attribute this to continued tight monetary policy and modest support from oil prices stabilising near $80 per barrel. However, risks remain skewed to the downside due to weak export demand, pressure on budget revenues, and possible new US sanctions as part of Trump’s “big announcement” to  sell Ukraine $10bn worth of weapons and impose 100% secondary sanction tariffs on anyone doing business with Russia if no ceasefire deal is signed in 50-days from July 14.  

Economists are divided on the ruble’s trajectory for the rest of the year. Forecasts range from RUB70, if the central bank delays rate cuts, to RUB91, if oil revenues continue to decline and capital outflows accelerate. A stronger ruble hurts the Kremlin’s income as the Russian budget denominates oil price estimates in dollars, but expenditure is in rubles; any devaluation creates more rubles to spend, while the budget’s expenditure values remain unchanged.

A snip of the scissors

The term “Kudrin’s scissors” appeared in the mid-2000s, when Alexei Kudrin headed the Ministry of Finance. He reformed the schedule of tax payments in such a way that the tax paid today was calculated based on yesterday’s parameters, such as the price of oil and the ruble exchange rate. Exporters “underpay” when actual oil prices rise or the ruble weakens, and “overpay” in the opposite situation. Now the duty is calculated based on monitoring for one month which has smoothed out the fluctuations, but exporters can still get walloped by big movements in the exchange rate which has become a lot more volatile since the war in Ukraine started.

Oil prices have swung between $139 per barrel in March 2022 to $37 in January 2023  and the exchange rate has gone from a high of RUB137 in March 2022 to a low of RUB52 in June 2022 after the CBR put in its wartime emergency rate hike in the first week of hostilities.

Now the ruble is stronger again, Kudrin’s scissor is becoming a problem again, partly thanks to the CBR’s high interest rates.

If the excessively strong ruble persists in the long term, as does the high key rate of the CBR, and prices for exported oil continue to decline, then the risks of a spiral may arise, according to economist Dmitry Malkov cited by Vedomosti.

The CBR is blaming the tight monetary policy as the main reason for the strengthening of the ruble but hopes to be able to start to ease monetary policy this year as inflation is falling faster than expected and has dropped from around 10% at the end of last year to 9.4% as of July. But at the same time oil and gas revenues have also fallen faster than expected that is putting the budget under pressure.

According to the Ministry of Finance, oil and gas revenues dropped 33.7% y/y in June to RUB494.8bn ($5.48bn), and fell 16.9% in the first half of the year to RUB4.7 trillion ($52.1bn). Experts estimates the year-end budget deficit will exceed the planned RUB3.8 trillion (1.7% of GDP) by RUB1 trillion ($11.1bn), taking the total deficit to RUB4.5-4.8 trillion ($49.8–53.1bn).

Weak dollar helping other EMs

The weakening of the dollar is good for other Emerging Markets (EMs). Using a cross-country scorecard, Oxford Economics identifies Egypt, Turkey, Chile, Malaysia, Hungary, and Colombia as economies best positioned to benefit. These countries exhibit high levels of dollar-denominated debt and other exposures that make them sensitive to shifts in the greenback’s value.

“The most dollar-dependent balance sheets are those that gain most from depreciation,” says Sterne. He points to Hungary and Chile for their elevated external debt levels, Argentina and Indonesia for their large share of corporate bonds issued in dollars, and Turkey and Mexico for their exposure through FX loans.

According to research by the Bank for International Settlements, a 1ppt dollar depreciation against a broad basket of currencies can lift global growth by more than 0.3ppts, with the effect doubling for the most vulnerable EMs. Global trade, much of which is invoiced in dollars, also benefits, rising by 0.5%-1% for every 10% depreciation.

Capital flows are another critical channel. As the dollar weakens and relative returns shift, inflows to EMs may accelerate. Egypt, Argentina and Brazil stand to gain most, based on Oxford’s sovereign risk indicators. Low FX reserves in Turkey, Argentina, and Egypt could also see some relief, as well as markets with high foreign participation like Peru and South Africa.

Deleveraging risks are likely to ease most in countries with high private credit burdens, notably China, Thailand and Malaysia. “A devaluation of dollar debt in local currency terms could reduce deleveraging pressure more generally,” Sterne notes.

Yet the anticipated virtuous cycle remains elusive. “Had tariffs resulted in a strong dollar, then those EMs with the most vulnerable balance sheets would have been the most exposed to a vicious cycle,” says Sterne. “This cycle never began, but we don’t find systematic evidence of a virtuous circle either.”

Crucially, there is no clear link between the EMs most exposed to dollar vulnerabilities and those that have posted the highest returns on local currency debt since what Sterne terms “liberation day”. “Our interpretation is that offsetting forces have been in play,” he says. “Amid the dollar weakness, there has been generalised risk-off sentiment within EMs.”