“This can drag on for months”: why the ruble falls and whether the dollar can be expected to reach 120

instant shock

As noted by the head of the SDM-Bank treasury, Eduard Lushin, the ruble has been falling since August-September against the background of falling oil prices, a lower threshold for the mandatory sale of export proceeds and sanctions against the Moscow Stock Exchange. the license to work with which external counterparts expired in the fall. However, in recent days an event occurred that caused the rapid collapse of the ruble.

“The trigger was a large-scale increase in the sanctions list for the financial sector, when those banks and financial institutions that could be providers of foreign exchange earnings from exports to Russia were placed under restrictions,” explains Lushin. First of all, we are talking about Gazprombank, which was blacklisted by the American Ministry of Finance. After 2022, the bank was “the main channel for introducing foreign currency into the Russian market,” says Natalia Orlova, chief economist at Alfa Bank.

“According to traders’ estimates, this channel accounted for just over half of the market’s foreign exchange earnings. The sanctions against Gazprombank force exporters to greatly change their logistics. Of course, a decrease in the supply of currency puts some strain on the market. For exporters this is an immediate shock,” says Orlova.

Finam FG analyst Alexander Potavin agrees with her. “Foreign buyers of Russian oil and gas are faced with the need to look for alternative payment methods. Over time, new ways will be found to send money, for example through accounts in other banks or using other currencies. But this takes time, increases risks and makes the payment process more expensive and opaque,” ​​said the expert.

The supply of foreign currency decreased at the wrong time: in December the need only grows. “Demand for foreign exchange remains high due to the traditional year-end increase in federal and regional budget spending, as well as increased consumer activity before the holidays,” explains Dmitry Babin, stock market expert at BCS World. of Investments.

Additionally, when the exchange rate weakens, many importers begin to purchase foreign currency. “Especially on the eve of the New Year, when you have to plan and pay for shipments,” adds Orlova. High demand in a context of low supply caused “an exchange rate movement as strong as the one we are seeing,” said the economist.

How will the authorities react?

On November 27, measures to support the ruble by the Central Bank followed: the regulator decided not to purchase foreign currency as part of the implementation of the budget rule until the end of 2024. “So far this has only caused a noticeable correction of the ruble, which recovered large daily losses and ended trading with an increase of almost 1% against the yuan,” says the analyst.

He admitted that financial authorities would take more drastic measures, including the return of a stricter rule for the repatriation of foreign exchange earnings. “It is true that now this will be less effective, since temporary difficulties may arise with the transfer of currency to the country in the context of sanctions against Gazprombank,” the expert added.

According to Orlova, the weakening of the ruble accelerates inflation, which goes against the plans of the Central Bank, which has raised the interest rate since the beginning of autumn to curb it. It is very likely that at the December 20 meeting the regulator will take the exchange rate into account when making a decision on the exchange rate. “Until now, the market was set at 23%. I think that now, of course, the market will think about a rate of 24% or even 25%,” the economist emphasized.

The Ministry of Finance has a different view of the situation. The head of the department, Anton Siluanov, speaking at the Financial University forum on November 26, noted that the fall of the ruble “greatly contributes to exports.” This, in turn, has a positive effect on the budget, so “the weakening of the exchange rate also has positive aspects for the monetary authorities,” notes Orlova.

Daniil Petukhov, associate professor at the Department of National Economy at RANEPA, agrees that the reduction of the ruble will be beneficial for the budget, given that “the budget deficit at the end of the year will be larger than expected.” “[Властям] A weaker ruble exchange rate is needed to fill the state budget due to huge defense costs. According to experts, a change in the dollar exchange rate of just 1 ruble can increase the annual budget revenue from oil and gas by about 100 billion rubles,” Finam’s Potavin stressed.

What to expect?

According to Potavin, the market expected the dollar to return to the 121 ruble zone (March 2022 record) next year, but “now this is becoming an immediate reality.” “Given that oil prices remain weak in November, it is apparently not worth expecting an increase in foreign exchange sales until the end of the year. Therefore, the three-digit levels of the dollar/ruble exchange rate are apparently eternal,” says the expert.

According to Lushin from SDM-Bank, the dollar’s trend limit is 115-120 rubles in the future for a maximum of six months. In the near future, the authorities will try to keep the exchange rate within 110 rubles. “In addition, the cost of 110 rubles per dollar is already enough to make notable profits and many players will start selling currencies, which will also stop the trend,” he believes.

If the Central Bank starts active interventions, the ruble could stabilize in two to three weeks, said investor and founder of the F11club investment club Stanislav Bondarenko. However, in conditions of currency shortage, the effectiveness of the instruments available to the Bank of Russia is reduced, noted Orlova of Alfa Bank. “If before there were companies that had large deposits in foreign currency and, during periods of weakening of the exchange rate, preferred to sell foreign currency and acquire rubles, now there are very few actors of this type within the system,” the economist explained.

According to her, the dollar reaching new highs is not the most likely scenario, but it is “very difficult” to predict how long the fall of the ruble will last under current conditions. According to Bondarenko, the trend can persist for a long time: “If sanctions increase and structural problems, such as the balance of payments deficit, remain unresolved, the weakening can last for months.”