Russian ruble to fall 10%: economist
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Emerging Markets

Russian ruble to fall 10%: economist

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The Russian currency could weaken against the US dollar if the eurozone crisis deepens further and oil prices fall, an economist said

The Central Bank of Russia’s steps to make the ruble’s exchange rate more flexible in the wake of the financial crisis that started in 2007 have made the currency “more volatile and responsive to external shocks,” according to Liza Ermolenko, an emerging markets economist at Capital Economics.

Other analysts have told Emerging Markets that Russia, with its strong economic fundamentals – economic growth, low debt to gross domestic product ratio and a current account surplus - was a “very cheap” investment opportunity over the long term.

Ermolenko listed three reasons for which the ruble is likely to enter a period of weakness and fall 10 percent in the next 18 months.

The first is the eurozone crisis, which Capital Economics predicts will intensify in the coming months despite recent statements by European Central Bank President Mario Draghi that the bank was ready to buy bondsof distressed eurozone members.

The currency’s flexibility itself - as the Central Bank of Russia (CBR) has reduced its interventions in the foreign exchange markets and has widened the currency’s trading band since the crisis that hit the country in 2008 and 2009 – will also contribute to its weakness.

“With limited scope for either a fiscal boost or significant cuts in interest rate, it seems that the exchange rate now acts as the main policy took for the CBR to support the economy if, as we expect, the external environment deteriorates,” Ermolenko wrote in a market note.

The second reason has to do with Russia’s balance of payments which, although still in surplus, “is not as solid as it used to be,” she said.

Imports are increasing fast and this, coupled with a possible fall in the price of oil – which Capital Economics predicts will decrease to $85 by the end of this year – will eat into Russia’s current account surplus, which could fall to around 3.5 percent of GDP this year from last year’s 5.5 percent and could even turn into a small deficit by 2014, according to Ermolenko.

RUBLE OVERVALUED?

Her third reason to predict a fall in the ruble is that the currency “looks overvalued from the point of view of the economy’s competitiveness.”

A combination of high inflation and currency appreciation means that improvements in competitiveness during the 2008 and 2009 crisis when the ruble fell sharply have now been lost, Ermolenko wrote, adding: “the real exchange rate (measured using consumer prices) is now back to where it was in mid-2008.”

She forecasts a 5 percent fall in the ruble against its euro/dollar basket by the end of the year with a similar fall next year, with the biggest declines coming against the dollar.

Ermolenko sees the ruble at 35.5 versus the dollar by the end of this year and at 38.5 by end-2013 from the current 31.9.

The euro is likely to weaken because of the eurozone crisis so the ruble “should hold up rather better” against the single European currency, she said.

Capital Economics expects the ruble to end the year at 39 versus the euro, broadly unchanged from 39.4 currently and to appreciate slightly to 38.5 by the end of next year.

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