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Russian authorities set course towards weaker ruble

June 18, 2013, 13:33 UTC+3 Alexandrova Lyudmila

MOSCOW, June 18 (Itar-Tass) – The Russian authorities have set course towards weakening the ruble, hoping this would encourage economic growth. Experts say the ruble would be falling anyway, without efforts by the Ministry of Finance, but at the same time they agree that this would benefit the economy.

Finance Minister Anton Siluanov broke the news such an option was being considered in an interview to Bloomberg on Monday. “A slight weakening in the ruble's exchange rate can play a positive role for federal budget revenue and the economy as a whole,” he said.

In August, the Finance Ministry will start purchasing hard currency for the Reserve Fund on the market, and not from the Central Bank, contrary to the current practice, Siluanov said. In his opinion, this may push down the rate by 1-2 rubles. The weakening will be able to raise about 190 billion rubles for the budget. Experts say that the ruble would fall even without any efforts by the Finance Ministry to this end. Also, they point to some likely benefits for the economy.

Russia’s economic growth has been slowing down since the middle of 2012. In the first quarter it fell to 1.6%. Starting from the end of 2012 the government has been discussing measures to stimulate economic growth, but no decisions have been taken yet.

Siluanov believes that a slight weakening of the ruble would benefit the Russian economy, because cheap national currency would support the domestic industry.

 “Smooth weakening of the ruble would be a blessing for the Russian economy, because it would enhance the competitiveness of Russian goods,” Economic Development Minister Andrei Belousov acknowledged just recently.

As follows from estimates by the Ministry of Economic Development, the annual average exchange rate of the Russian currency in 2013 will be 32.4 rubles per dollar. At the moment one dollar is trading for 31.67 rubles.

International investment banks had come out with a negative forecast for the exchange rate of the ruble on the eve of the St. Petersburg Economic Forum. Even Bank of Russia President Sergei Ignatiev’s statement to the effect he felt doubts about the further fall of the ruble was unable to change their mind. Global investment banks polled by the RBC Daily believe that by the end of the year the dollar will cost 32.5-33 rubles.

“One should also bear in mind that the government is keenly interested in a weakening of the ruble, because this is a universal way of replenishing the budget and supporting economic growth,” the daily quotes the chief economist of the Russian office of the Bank of America, Vladimir Osakovsky, as saying. He expects the ruble fill fall against the dollar to 33 rubles, and to 36.7 rubles against the bi-currency basket.

He sees several reasons for the ruble’s downtrend. Firstly, a reduction of Russia’s current transactions account in the context zero growth in the prices of oil. “Secondly, we expect that the Bank of Russia will reduce the discount rate by 75 basis points this year, which will add to the pressures on the ruble,” he explained.

Experts’ forecasts of the likely effects of the ruble’s lowering are varied.

A nominal reduction by 3%-6% in the context of a 6%-7% inflation will provide no support for growth. It is the real rate of the ruble that is important to the industry, and that real rate is conducive to inflation,” Yevgeny Gavrilenkov, of Sberbank CIB, is quoted by the portal as saying.

The ruble’s exchange rate has been steady on the descent since February. It has been down against the dollar by 6% since then, Gavrilenkov said. A major devaluation, like the one in 1998, would be of little help now, he warns. The economy has changed, in the trade sectors the share of import components is very large. Devaluation would hit the industries really hard, and not support them. As for non-trade sectors, a weakening of the exchange rate is of no big significance.

A weak ruble is good, “because it will stimulate exporters, our products will be more competitive on the world market,” the government-published Rossiiskaya Gazeta quotes stock markets and investment lecturer at the Higher School of Economics, Alexander Abramov, as saying. Besides, a weak ruble will be a very strong counter-measure to capital flight,” he says with certainty. But the very same measure will make credit more expensive and pressures on personal budgets will soar.

Yet there is a way out of the situation. “To bring about economic growth there will have to be gradual weakening of the ruble, without any panic, but the point where a weak national currency will be able to ensure stable economic growth is anyone’s guess,” Abramov said.

What is the surest way of weakening the exchange rate without causing too much harm to the population? The analyst believes that steady increase in money supply is practically the only way.