Should Russians buy up dollars after Finance Ministry?

All the currency is purchased by the Ministry of Finance for the National Wealth Fund (NWF). It is necessary to remind you that this fund is replenished with the help of a budget rule that envisages the so-called cut-off oil price bar that is now fixed at $43,3 per barrel. Additional oil incomes above this price are used to purchase currency for the NWF.

The July digit of 296 billion rubles comes from 242 billion rubles of incomes from oil prices above this bar. Plus 54,1 billion rubles of excess incomes of the previous month. As a result, $14,1 billion were withdrawn from the market in July. Moreover, transactions on fund replenishment resumed this January and totalled just $11,1 billion in six months.

All this makes one think that the ruble is now deliberately allowed to get stronger. As we talked about the rise in the Central Bank’s key rate in an article, there was an interesting discrepancy in the movement of rates depending on oil prices.

Reasons for ruble rate’s stagnation

For example, oil fell below $40 per barrel, the ruble cost less than 80 rubles per dollar in November 2020. Today oil is sold for more than $75 per barrel, while the ruble remains in a narrow diapason of 73-76 rubles per dollar. It seems that the Central Bank (CB) is deliberately keeping the ruble cheap — to help exporters and the budget (to increase incomes and reduce commitments). The Finance Ministry has to buy currency within the budget rule in the current situation taking the ruble’s considerable part of the potential for reinforcement. Our international reserves are growing followed by inflation. With a lower dollar rate, we as consumers wouldn’t be paying so much for imports. Experts agree that the ruble’s potential for growth is at least 10 rubles, that’s to say, the rate could certainly be around 60 rubles per dollar.

Also, excess pressure due to the expectation of new sanctions and the action of the already imposed restrictions impede the ruble from becoming stronger. This is seen in a big capital outflow from the country, therefore even with high oil prices a net currency influx to the country is less than it would be in usual conditions. The sale of Russian state bonds has started to gain momentum in August. Amid non-residents’ record investments equal to 190 billion rubles in three weeks of July 2021, the market of federal loan bonds has been falling without stopping since early August and has lost half of July’s growth. A fall in oil price complements this pressure.

If we globally have a look at the state of the Russian economy, world prices for our exports (oil, gas, metallurgy and agriculture) stay high, the budget has been in surplus since spring. The CB is fighting inflation (as much as it can considering that it is constantly accused of choking the economy’s growth). We have a classic commodity currency that in fact is due to respond to changes in oil prices in a linear fashion. But due to a number of reasons, we got rid of this dependence.

By buying big amounts of currency, the Ministry of Finance doesn’t let the ruble get stronger, which in turn stabilises inflation. In the third quarter, the balance of payment surplus will be around $20 billion. This is an indicator reflecting the situation in which total net currency transfers to the country exceed their total outflow outside the country. During this period, the Ministry of Finance is planning to buy $12 billion from the market. While a surplus could strengthen the ruble, and imports could be cheaper for an ordinary consumer. But our government is, first of all, concerned about our big exporters’ revenue, while the current ruble rate is comfortable for them. Revenue in currency, expenses in rubles — a perfect layout.

In autumn when the Central Bank finishes the rise in the key rate to 7-7,25%, an additional influx of money of international investment funds to buy Russian state bonds is expected. This will give the ruble a chance to become stronger, it will be interesting to see how the Ministry of Finance and Central Bank will behave, a game against the whole market that wants a strong ruble, which can be expensive.

Why Central Bank is raising the key rate

In March, the CB had to take action and start raising the rate, at that moment, it was at 4,25% — a historic low. It seemed that it was possible to halt the inflation spiral with the help of small rises. But a result isn’t seen yet — we are losing the fight against inflation. We should keep in mind that the effect of changes in the monetary policy happens with a delay. The rise in the key rate by 2,25% in five months is just starting to impact inflation trends. We will feel the real effect from the measures taken only in the fourth quarter this year. As we noted in an article earlier, besides the monetary policy, the economic situation of commodity markets, which are now at the peak and are expecting a correction, also influence inflation.

In general many experts doubt that instruments of the monetary policy alone can cope with inflation. Given the tone of the CB’s statements, the increase in prices is primarily conditioned by sustainable factors — when demand outstrips supply. The CB considered earlier this year that inflation was stirred up by the growth of world prices for commodities, this was seen as a temporary occurrence.

In conclusion, I would like to note that among all the above-mentioned factors, we shouldn’t expect a stronger ruble. Neither is there a point in buying up dollars after the Ministry of Finance. The ruble won’t fall further either, the government is fine with the current rate of 73-76 rubles. And if needed, the CB will start selling the currency at the exchange to save the rate from a collapse. And it is not logical to buy the dollar now expecting its growth, why we should spend our ruble incomes on the “expensive” dollar. We are in general playing the role of static observers now whom absolutely nothing depends on.