Oil and gas in the capitals

The economic situation in Russia is improving. Although the recovery is slow, the country’s growth is potentially significant. The weakening ruble is one of the keys to this improvement. Also, allowing the development of the export industry, has revitalized the entire economy. This change in the business model has lowered the sensitivity of exchange rates to oil prices. This creates a significant increase in the savings rate, and enables the refocusing of investments in the national economy.

The situation has improved significantly in the last 2½ years, and in a sense, the “penalties” imposed by western countries, although not the initial trigger, have accelerated this evolution. Similarly, the pivot of the Russian economy towards Asian countries is slow, but it continues at a steady pace. Like it or not, Russia is stuck in a period of “de-globalization.”

The exchange rate. An analysis of the ruble’s exchange rate since 2014 shows it has depreciated significantly. A great deal of the currency’s devaluation is clearly related to the decline in oil prices, starting in the autumn of 2014. It is also clear that the ruble (RUB) was the target of speculative attacks at the end of 2014. It is interesting to note that as oil prices rose to $45-50/bbl, the ruble’s nominal exchange rate (including inflation) should have settled at 76-78 RUB/USD. But the exchange rate now seems stable at approximately 63-65 RUB/USD. This means that in relation to the situation of early 2014, a 20% appreciation of the exchange rate is parity tied to the price of oil.

Contributing factors. Over the past two years, oil companies have become more productive, and the effectiveness of the public budget has appeared to improve. One thing we know for sure, is that the share of Russia’s hydrocarbon export earnings has decreased. Note that the success of exports, excluding oil and gas, is largely explained by the depreciation of the RUB, making Russian companies more competitive. Local and regional studies show an increase in export-related jobs and equally significant wage hikes. The unemployment rate is very low, but with significant industry-specific disparities. The service and marketing sector is still down, compared to manufacturing and other industrial sectors.

In fact, the Russian RUB was overvalued at the end of 2013, and I felt, at the time, a depreciation of 15-20% was needed to help stimulate the economy. Although I was optimistic, history showed that a larger depreciation (at least 25%) was required to push Russia back into the world economy. Many of my colleagues, both Russian and French, opposed me, saying that any RUB depreciation would have had negative effects, due to the dependence of the industry on imported products. This dependence is obvious, but it is much less than what was assumed by my colleagues.

Applying a 25% depreciation of the RUB’s real exchange rate, computed in December 2013 terms, it currently is trading at 52.5 RUB/USD, with an actual nominal exchange of 64 RUB/USD. That gives a relative undervaluation of -22%. Note, here, that a July 2016 IMF External Sector Report, assumes that the currency’s exchange rate was at its “parity” normal in 2015. This would imply a significantly higher initial overvaluation at the end of 2013.

However, this study takes as a basis the balance of current countries, and the weight of oil, upward or downward. However, I believe these are the wrong parameters to accurately calculate a real-world exchange rate. We are in a situation where, in relation to oil prices, the RUB is overvalued, but actually undervalued in relation to what other industries require. This corresponds perfectly to what Russia needs to continue its economic recovery.

Macroeconomic developments. Macroeconomic data for July have brought a positive surprise in the field of trade and retail investment. Retail trade contracted only –5.0% year over year, versus –5.8% to –5.5% rate forecast by the consensus of Russian analysts. The unemployment rate in July was 5.3%, and it has continued to decrease since the beginning of the year. As for nominal wages, they increased 7.8% (more than inflation and, therefore, experiencing an increase of 0.6% in real terms). This explains the constant improvement in consumption, which should continue in August, given the fact that the index used is more representative of current trends in household spending.

The index of construction fell only –3.5%, while it was expected to decrease –8.0%. This would indicate that the construction sector is in the process of recovery. The only negative was the 0.3% drop in industrial production in July, which was well below forecasts of 1.2% growth (consensus was +0.8%). However, over the last five months of the year, growth of industrial production was 0.4% a month, on average. The recovery of GDP implies that this is now spreading to the services sector.

Regulatory restrictions. Another indication that the economy is improving is that increased consumption did not damage the strong savings trend. According to the Central Bank of Russia, the retail deposit market was surprisingly higher, with 15% growth reported in July. This confirms that households continue with their deleveraging strategy. We attribute some of this growth to “regulatory de-offshore-ization” that restricts wealthy individuals’ ability to transfer money abroad. It is possible this legislation was a factor, but it cannot fully explain the movement of all deposits.

The increased market sensitivity to volatile exchange rates also supports the view that in July, when the RUB began to depreciate again, retail foreign currency deposits were up 2% from the month before (or $2 billion), suggesting a jump from the professional market players among depositors. But the positive trend is obvious in the last six months. Regulatory and non-regulatory measures to encourage the most affluent Russian households to repatriate their assets are proving effective. 

About the Authors

Jacques Sapir

Contributing Editor

Jacques Sapir is a professor of economics at the School for Advanced Studies in the Social Sciences (EHESS) in Paris, and at the Higher School of Economics in Moscow. An expert on Russian economic policy, he graduated from the Institute of Political Studies in Paris in 1976, and earned a PhD in economics from EHESS in 1980.