Ruble exchange rate a problem for Putin’s reelection

Ruble exchange rate a problem for Putin’s reelection
Putin reintroduced a mandatory FX surrender rule on exporters as the Kremlin tries to shore up the value of the currency ahead of next year's presidential elections to reassure Russia's exchange rate-savvy voters. / bne IntelliNews
By bne IntelliNews October 13, 2023

Russian President Vladimir Putin has signed a decree reintroducing obligatory foreign currency revenue sales by some Russian exporters for the duration of six months, according to a government statement, as the Kremlin strives to shore up the ruble's value ahead of presidential elections next year. 

The list of entities subject to the ruling consists of 43 groups of companies working in the energy, non-ferrous metal, chemical sectors, the timber industry and agriculture. The exact parameters of the selling rules are to be announced by the government in the coming days.

The Central Bank of Russia (CBR) has been struggling to prop up the ruble this year which has been weakening since January after the EU slapped twin sanctions on Russia’s crude oil and products exports, leading to a collapse in oil revenues. Massive capital flight last year has also undermined the value of the national currency.

The fall in the ruble threatened to turn into a rout in August after the ruble exchange rate fell below the “psychologically” significant threshold of RUB100 per one US dollar. The CBR stepped in and was forced to put through an emergency 350bp rate hike on August 15 that was followed by another 100bp hike in September.

Since then amid rising inflationary pressures the CBR continued to hike the key interest rate and warned that it will maintain a hawkish monetary stance throughout 2024.

While the increase in the prime interest rates brought some temporary relief, the ruble has been weakening again in October and once again briefly crossed the important RUB100 to the dollar mark before Putin announced the mandatory surrender of FX requirements this week that led to a ruble rally.

As covered by bne IntelliNews, previously the government and the Kremlin stopped short of reintroducing de-facto capital controls, but commentators believe that ruble exchange rate will come increasingly back into focus as presidential elections in spring 2024 approach. The exchange rate is traditionally the most watched economic indicator by ordinary Russians.

Previously Vedomosti daily claimed citing unnamed sources that after the ruble devalued rapidly in August, the government managed to informally persuade exporters to increase currency sales on the market.

The news on the new official requirement to sell off FX indeed pushed the ruble rate back to RUB96.8 to US dollar and the analysts surveyed by The Bell that it could support the national currency further to RUB90 to US dollar. However, the measure is seen as largely short-term. Previously in 2022 amid the fallout from the full-scale military invasion of Ukraine, exporters were already obliged to sell 80% of their foreign currency proceeds, reduced to 50% after three months, and completely lifted after one more month.

Despite the Governor of the CBR Elvira Nabiullina previously opposing any form of capital controls, the CBR did not condemn Putin's decree, commenting that mandatory sales of export revenues under Putin’s decree can increase the efficiency of currency sales and contribute to reducing short-term volatility.

The debate on policy between the CBR and Ministry of Finance, which is more in favour of capital controls, has been very public. Nabiullina’s objection is that it is too easy to evade capital controls, as testified to by the huge outflow of over $250bn of capital flight in 2022, despite the strict controls put in place by the central bank after the start of the war in Ukraine. Nabiullina argues that the better way to control the value of the currency is through economic enticements and monetary policy.

The debate on what to do remains ongoing. Putin’s decree is likely to be a stop gap measure that will shore up the strength of the ruble for the meantime and only affect the largest of Russia’s state-owned enterprises exporting raw materials, in preference to blanket tough capital controls that will affect everyone.





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