December 16, 2014
Sergey Lopatnikov is the author of two monographs and 150+ publications in physics, acoustics, geophysics, mathematics, physical chemistry, economics, and dozens of publications in the leading Soviet and Russian media in the field of geopolitics, policy analysis and economics.
You have to realize that foreign exchange is a game. That is, there are players with opposite interests. Importers are interested in a high rouble. Importers fall into two groups, importers of critical import, and consumer goods, and the currency borrowers.
The second group is the exporters. Exporters are interested in a low rate for the rouble, because they pay their workforce in roubles, but their income is in a foreign currency.
In the same way, there are two groups on the subject of inflation, simply put, inflationists and anti-inflationists. Inflationists are typically the type of Yavlinski and Glazyev. Up front, they are strivers for the people, but actually, guardians of the interests of the bankers and the traders, since in high inflation, only activity with a high rate of capital turnover can survive. Anti-inflationists promote production activity with slower turnover, and in the end, are doomed, if the inflation exceeds a certain threshhold, typically on the order of 15 % per year.
Today’s remarkable behavior of the rouble shows that, for the time, there is no consensus between importers and exporters, and a war is going on, but this effect will be short-lived.
What is the outcome going to depend on? And what is the source of my optimism? Very simple: The weakening of the rouble is equivalent to the imposition of sanctions on imports, both consumer goods and critical goods. But if the country generally can refuse consumer goods slightly more than completely, blocking external loans brings a problem, but the country can’t refuse critical import in principle and gets it any way it can – bribery, appeal to the third countries, etc.
Until very recently, the rate of the rouble was determined by what any importing and currency loans allowed. But, because of the events of 2014, the powers got to the point that the west was no brother of Russia.
Obviously then, dependence on import should be reduced, as well as currency loans of the companies – about what I personally wrote in 2007 in “Profile”: Russian business is over-financed to the brink abroad — this amounts to reparations paid to the West. And I closed with the plain threat that all property of over-financed companies will pass to their Western owners.
In other words, the rouble exchange rate was set first, so that the country could be awash in consumer goods (which was the liberal policy of the 80’s. Shmelev was its author), second, so that companies could get cheap credit from abroad. At the same time — as I also wrote, companies actually took loans against the security of Russian gold and currency reserves (!), which therefore were stored abroad.
Naive people suppose that a prohibition on Russian banks and companies from borrowing abroad is “sanctions for Ukraine”, but in reality – these are sanctions for the withdrawal of gold and currency reserves from abroad… The residue simply got lower than the debt load of the Russian companies, and the Western creditors ended up in the zone of commercial risks not covered by the GCR. As a result, holding the rouble exchange rate in favor of borrowers was senseless. The choice is either pawn the reserves under Western control, or reduce own risks and live off one’s own.
The second choice was picked by agreement on both sides: It is Russia that began to take out the reserves out of the Western paper, and to collect gold. So instead, internal credit will be growing and a more refined mechanism, through creation of sufficient investment in countries, first of all in China, which have good investment positions in the West.
It will mean some rise in price of the currency credits for Russia during a decrease in political risks in the West (but their growth in the East).
Russia’s refusal of excessive Western debt load was obvious since the end of 2013. This was about a disappearance from “an import pool” of the role of credit, and the corresponding reduction of the import of consumer goods based on the short-term Western credits.
The equilibrium exchange rate in this case was calculated in 2013, in particular in works of the Institute of Economy and was estimated at 45-48 rubles for a dollar. That is where the number came from.
The Central Bank, quite naturally and correctly used the reduction of the price of oil to lower the rouble WITHOUT DOING NOTHING AT ALL. This can be seen following the results of 2009, when after 888 [8/8/8 ? – tr.] the price of oil was dropped from $140 a barrel to below $40. The moment when I wrote about 45-48 dollar rate corresponded to my feeling that the time had come for the Central Bank to enter the game, and enter they did, increasing the rate to 17%. For comparison, I want to remind that in 1999 the rate was 80-85%. And everything was okay. Sharp jumps in the rate mean one thing. The rouble started to sharply strengthen, more sharply than ‘normal’. It frightened first of all the foreign speculators who were holding the dollars in anticipation of a further falling of the ruble. In response they took the dollars out of the Russian market and again brought down the rate.
In my opinion, it does not mean anything except that now there will be turbulence in the market until the strategy of the Central Bank will be completely clear to the players.
So far one thing is clear, that thanks to a sharp growth of the dollar somebody, but in my opinion, the Central Bank, has made out very well with dollars. What is interesting – today’s announcement of Nabiullina obviously has a purpose to cheapen the ruble even further. This will allow the Central Bank to buy five-kopek coin for a groat.
I will not hold back on my forecast of 45-48 rubles to the dollar by February-March. And I want to stress: my remark that “this is just the beginning” – is not about a particular effect of a strengthening dollar, but about the fact that the Central Bank SEEMS TO BE FINALLY MAKING MOVES. Simply TODAY Central Bank entered the game. And we’ll see the results by February-March.
Therefore there is no need for premature whining.
Translated by Tom Winter for FortRuss.blogspot.com