Major repairs: is the ruble overvalued
The ruble exchange rate in Russia has risen sharply since the beginning of the year, and then stabilized at high levels by recent standards. For example, the dollar on the interbank market has been stable in the range of 80-85 rubles over the past couple of months, and on Wednesday, May 21, the official exchange rate for the first time in two years was fixed below the important mark of 79.75. The exchange value of the yuan approached 11 rubles. All this looks ambiguous, given the relatively low oil prices and the ongoing sanctions war against Russia. Many analysts believe that the ruble is overvalued in the long run. However, there is some evidence to the contrary — due to changes in cash flows from Russia abroad and back, equilibrium at the current relatively high level may be established for a long time. Izvestia investigated who was right here.
Reinforcing sanctions
In previous years, the theory of chronic underestimation of the ruble was very popular. Such opinions were expressed, for example, from a comparison of the "big Mac index" (according to which the Russian currency should have cost about twice as much) or other instruments comparing purchasing power in different countries. This was countered, as a rule, by arguments about chronic capital outflows, which intensified in parallel with the strengthening of the trade balance. This constant demand for foreign currency, coupled with the active accumulation of international reserves, steadily "squeezed" the ruble from above.
Russia has been actively investing abroad, so since the 2010s, a positive investment position has become the norm. But residents' funds (including the state) were more often invested in low-yield instruments, while foreign (including initially Russian investments from offshore companies) investments in the country brought much more income. All this was reflected in the outflow of capital.
But since 2022, the movement of financial resources has become fundamentally different. Tough sanctions against Russian businesses, as well as the mass withdrawal of foreign companies, have to some extent "locked up" money in the country. In turn, the Russian authorities have also restricted the withdrawal of capital. Foreign investments have become both less affordable and more risky. And the result was not long in coming.
First, the external debt has sharply decreased (we are talking about the total obligations of the state, companies and individuals to foreign residents). This process has been going on since the mid-2010s, but has accelerated markedly in recent years. In 2017, the total external debt amounted to $529 billion. In 2021, it fell to $478 billion. Finally, in 2024, it dropped to $290 billion. That is, there has been an almost twofold drop in absolute numbers, and if we take into account inflation and even more so as a share of GDP, then the difference of two times will even be an underestimation.
The net investment position has grown even more. Compared to 2015, Russia's assets abroad have increased by about a quarter. At the same time, liabilities to non-residents fell by about 40%. Accordingly, the position reached almost a trillion dollars. With such a huge difference, even significantly higher interest payments in Russia compared to foreign economies cannot tip the scales.
This tectonic shift has also affected capital outflows. If in 2021 it was equal to $74 billion, then in 2024 it was only $47 billion. In fact, most of the capital that could and wanted to leave Russia has already done so.
As a result, a new capital flow rate has emerged, as a result of which the pressure on the ruble has noticeably decreased. By the way, the government is now extremely reluctant to invest in foreign assets. Does this mean that it is necessary to talk about the revaluation of the ruble in the current conditions with great caution, and the market has managed to find a new point of equilibrium? Experts believe that although the change in the interaction of Russian capital with the world is changing a lot, other factors remain in force or appear.
Izvestia gathered expert opinions.
Anton Tabakh, Chief Economist at Expert RA Rating Agency
The factors of the changed capital movement do take place. But this is only one side of the coin. The capital is not locked up, there is communication through third countries and intermediaries. There is an opportunity for the export of financial resources, and the arrival of currency for "carry trade" (loans in low-interest currency and investments in the currency of the economy with high rates. — Ed.). If rates decrease or increase in the United States and the eurozone, some of the money will "go out." Ultra—high rates are the most important factor.
In addition, there is a large overhang of frozen funds in type C accounts — this is a longer-term issue, but unraveling this situation will be very important on the Central Bank's agenda if it moves towards normalization and easing of sanctions. The trade balance remains positive, but the balance is smaller than in previous times. Finally, the foreign exchange market has become more "thin" and fragmented.
In terms of the amount, the exchange rate does not look balanced. In 2019-2020, the exchange rate was about 70 rubles per dollar. The difference in accumulated inflation between Russia and the United States has since amounted to about 30%, and no one has canceled or will cancel tougher sanctions and other risk factors. Plus, there is the experience of recent years, when a strong first half of the year was followed by a weak second and the end of the year — and this year the factors that analysts will justify the fall are already roughly clear: lower interest rates, increased uncertainty in the global economy, cheap oil.
Natalia Orlova, Chief Economist at Alfa-Bank
It should be understood that there is a concept of an equilibrium exchange rate, which is determined from the competitiveness of a country's economy. To do this, it is necessary to evaluate the dynamics of domestic prices in comparison with prices abroad. In recent years, inflation in Russia has exceeded the target, which was already quite high at 4% according to the standards of our trading partners (USA, EU and China). Sooner or later, this accumulated inflationary pressure must translate into a reduction in the nominal exchange rate in order for the economy to remain competitive. From the inflation differential, it seems that the equilibrium exchange rate should be 100 rubles per dollar — this is a completely secure estimate.
Another question is to what extent the conditions in the Russian economy are in equilibrium. In reality, we see an extremely high interest rate, which is clearly above equilibrium, as the Central Bank is struggling with inflation. And this high rate just ensures a temporarily strong exchange rate. When inflation slows down, the Central Bank will lower the rate and the exchange rate will return to an equilibrium position.
Ilya Fedorov, Chief Economist, BCS World of Investments
Weak demand for the currency remains. It is now twice as low as the average in the second half of last year. The main problem of weak demand for foreign currency is the low demand for imports. High interest rates reduced the demand for loans that financed the purchase of durable goods. A large item of import costs is motor vehicles. And now, in fact, there is no demand for cars, loans, or currency.
A number of companies that cannot or do not want to sell foreign currency at the current exchange rate issue quasi-foreign currency debt securities. Payments are linked to the ruble exchange rate, and payments are made in foreign currency. There is no currency risk for issuers, as it is linked to foreign exchange earnings. From February to April, $5.2 billion worth of such securities were issued, $4 billion of which fell in the first two months of spring. This money could have been used to buy foreign currency, and then we would have seen a weakening of the exchange rate by 2-3 rubles. At the same time, oil companies do not receive payments from the budget under the damper due to low world prices and a strong ruble. To compensate for the loss of ruble revenues, they additionally sell foreign currency by an average of $ 2 billion per month, providing a weakening of the exchange rate by about 4 more rubles.
Alexander Potavin, Analyst at FG Finam
The situation with Russia's fundamental indicators regarding the ruble exchange rate is quite difficult. On the one hand, we see that according to the latest Central Bank balance of payments data for April, the trade surplus of the Russian Federation is reduced to $9 billion. Exports decreased by 4%. At the same time, imports increased, amounting to $24.2 billion. At the same time, there is no weakening of the ruble exchange rate. This can probably be explained by the structure of foreign exchange earnings, as this year the share of import payments in the Russian national currency is steadily exceeding 50%.
In addition to importers, foreign currency within Russia has become an uninteresting asset, since the ruble exchange rate has been strengthening almost continuously for 4.5 months now, and it is difficult to attach the purchased currency somewhere to generate additional income. At the same time, investments in ruble assets still bring good returns, taking into account high real rates. Another factor in the strengthening of the ruble exchange rate is the increased volume of currency sales in the domestic market. In the spring, the norms for the sale of currency by exporters in the domestic market are significantly exceeded, which leads to an oversupply of currency in the domestic market and strengthens the ruble. According to the Central Bank, since the beginning of the year, exporters have sold about 90% of their foreign exchange earnings on the domestic market, at a rate of 36%. Such an increase in currency sales may also be related to the desire to receive additional income from placing funds at high ruble rates.
The ruble has been continuously strengthening for several months now, which attracts speculators here, who additionally "short" the currency, strengthening the ruble. The fact that the currency purchased on the market is difficult to export from the country or place it profitably, leads to the fact that the aggregate demand for it has significantly decreased both from companies and from the population.
According to the International Energy Agency, the average cost of Russian export oil of all grades in April was $55.64 per barrel. This means a decrease in the inflow of foreign currency from exports. According to the latest IEA report, Russia's revenues from oil and petroleum products exports fell to $13.2 billion in April, the lowest level since June 2023. However, now this drawdown in terms of currency inflows from exporters seems to be offset by the inflow of foreign currency to Russia from residents. Hopes for an end to the military conflict in Ukraine and high rates on ruble assets are pushing Russians to return home some of the money they had previously withdrawn from the country. According to the Central Bank's preliminary estimate, in March, the inflow of funds from Russian household accounts in non-resident banks to Russian banks amounted to 56 billion rubles.
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