An interesting view on the Russian ruble medium term outlook was published in the ECR weekly monitor arguing that as USD/Euro moves to dollar strengthening, we can expect devaluation of the ruble vis dollar by ca 10% over the coming 18 months. Liza Ermolenko, economist with Capital Economics, provided three core reasons for devaluation:
- Expected intensification of the euro area crisis will likely weigh on Russian exports just as the Central Bank of Russia (CBR) is reducing market interventions in support of ruble and is aiming to widen the currency band. Monetary conditions are expected to stay relatively stable, according to Ermolenko, as fiscal spending will also remain constrained.
- Deterioration in Russia's balance of payments due to fast growth in imports, and possible fall in oil prices to USD85 pb by the end of 2012. Capital Economics projects Russia's current account surplus to fall to 3.5% of GDP in 2012 from 5.5% in 2011, with a possibility of posting a small deficit in 2014.
- Long term competitiveness is deteriorating in Russia, as the economy gave up productivity and cost competitiveness gains of 2008-2009 crisis period to higher inflation. "Real exchange rate [linked to consumer prices] is now back to where it was in mid-2008", according to Ermolenko.
So Ermolenko forecasts 5% decline in the ruble against the euro/dollar basket by the end of 2012 and a similar decline in 2013, with most of the decline driven by devaluation against the USD. Target is Rb35.5/USD by end-2012 and Rb38.5/USD by end-2013 from current Rb31.9/USD. Euro forecasts are for slight devaluation to Rb39.0/Euro by end-2012 followed by appreciation to Rb38.5/Euro by end-2013, compared to Rb39.4/Euro current.