As inflation slows and the ruble accumulates, Russia is hoping to avoid a crisis

Russian President Vladimir Putin.

Pool | Reuters

Russia believes it has averted a financial crisis with its currency accumulation and improved economic data, but strategists say the numbers mask some ugly truths for Moscow.

Although inflation in the country continues to heat up, there are signs that inflation is slowing and will continue, as the Russian ruble moves from an all-time low in March to the world’s best-performing currency this year.

Meanwhile, indicators of economic activity are improving and Russia has so far been able to avoid defaulting on its foreign exchange debt, despite Western sanctions freezing a large portion of its reserves.

Russian inflation hit an annual 2-decade high of 17.8% in April, rising to 16.7% in March, but inflation is showing signs of slowing. Consumer price inflation slowed sharply from 7.6% in March to 1.6% in April, and prices of non-food products rose only 0.5% from 11.3% in March.

Further upside is expected to moderate in the coming months, and the market supports Russia’s central bank to continue raising its emergency interest rates, possibly with a 200 basis point cut in June.

Several days after Russia’s unprovoked aggression in Ukraine to rescue the ruble, the CBR implemented an emergency rate hike that brought the country’s core interest rate to 9.5% to 20% by the end of February. The central bank has been able to shift that rate to 14% due to the inflation outlook and the improvement in the currency, and Capital Economics is seeing further changes ahead.

“Today’s [inflation] The figures will further support the central bank’s assessment that Russia has passed the acute phase of the crisis, “emerging market economist Liam Peach wrote in a note last week.

“It is possible that consumer prices rose less than 1% m / m in May and that headline inflation peaked below 20% by the end of this year.”

Ruble elasticity

The slow price rise follows a steep appreciation of the ruble, which in turn lowers the import price.

As of Tuesday morning in Europe, the ruble was trading above 62 against the dollar on March 7, following the announcement of an international sanctions suit in response to Russia’s aggression, which dropped to an all-time low of 7 150 on March 7. Of Ukraine

Despite the broad strength of the dollar, due to its perceived safe haven in the face of risk aversion in the global market, the greenback has depreciated about 17% year-to-date against the Russian currency.

Strict capital control measures from Russia’s central bank – including ordering companies to convert 80% of their foreign exchange revenues into rubles – have helped revive the ailing currency. The Kremlin initially banned Russian citizens from transferring money abroad, and transfers are now limited to $ 10,000 per person per person until the end of 2022.

“Russia’s economy continues to recover from its initial setbacks in late February and early March,” Goldman economist Clemens Graf wrote in a note earlier this month. “Concerns about financial stability are fading, the RUB has returned to early 2020 levels.”

Although, according to many analysts, measures to protect Moscow’s currency are tantamount to manipulating, the demand has been created that would not otherwise exist and capital controls have effectively turned the ruble into a “managed” currency.

Charles-Henry Monchau, chief investment officer at Switzerland-based CIS Bank, suggested that the Russian central bank had deployed various tools to make the ruble more valuable, with very few people outside Russia “wanting to buy a ruble unless they absolutely have to,” and traders. The ruble will no longer be seen as a free trade currency. “

“If Russia succeeds in lifting sanctions and finding a solution to Ukraine’s problems with the result of the resumption of trade relations with the West, the ruble could potentially retain its current value,” he said.

“On the other hand, if measures are withdrawn without a resolution, the ruble could collapse, leading to an explosion in domestic inflation and a deep economic recession in Russia.”

And Russia has taken another step on the shores of its currency. The CBR has resumed buying gold after a two-year absence in the domestic metal market, hoping to save value to protect Russian assets against inflation in order to further push foreign currency liquidity.

“Another strong move has been relatively unnoticed in the Western media: the Bank of Russia has resumed buying gold at a fixed price of 5,000 rubles per gram between March 28 and June 30,” said Manzhou of Syz Bank.

Since gold is traded in US dollars, Manchau noted that it enables the CBR to link the ruble to gold and set the floor price for the ruble in dollar terms. Further rise in the ruble could therefore push up gold prices, and Russia, which has been rapidly accumulating precious metals since annexing Crimea in 2014, is now proud to have the world’s fifth-largest reserves.

Therefore, the move provides further protection against liquidity constraints as a result of further sanctions on the Russian economy and the depreciation of the country’s foreign exchange reserves in the service of dollar-denominated debt.

The closely monitored Purchasing Managers’ Index also shows some improvement in economic indicators

After dropping from 48.6 in February to 44.1 in March – indicating a contraction below 50 – the April figure rose to 48.2. According to Goldman Sachs, this was largely due to improved output and lower supplier delivery times.

“Russia’s financial situation has largely improved following the spread of a narrow CDS (credit default swap) because Russia has paid the Eurobond principal and interest in USD,” Goldman’s graph noted.

Russia successfully repaid the holders of two dollar-rich Russian sovereign bonds worth $ 650 million before maturing in 2022 and 2042 and ending the 30-day grace period on May 4. However, analysts still warn that there is a high probability of a Russian default in the next two years.

Temporary victory

Collective data improvements have led Russian President Vladimir Putin to claim that the West’s “economic blitzkrieg” – or “lightning war” – has failed.

While Russia appears to have averted an impending economic collapse, the long-term outlook is less optimistic, as the knock-on effect from the mitigation measures and the threat of further sanctions remain at play.

A recent survey by Russia’s central bank on more than 13,000 businesses revealed that many are already having trouble importing goods into the country.

These include car parts, packaging and microchips, and shortages of raw materials are forcing some companies to suspend factory operations or seek resources elsewhere, the survey found.

Meanwhile, Elena Rybakova, deputy chief economist at the International Finance Institute, told the BBC last week that “above” economic indicators would mean little to those on the ground, where job security is unclear for many Russians.

“This year, we will see an impact on the Russian economy as companies start running out of equipment and people have to start laying off or taking unpaid leave,” he told Grid News in a separate interview this week.

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