Page 63 - RPTRusFeb17

higher oil prices and Russian assets back in demand since the end of 2016. The ministers of finance and industry argued that strengthening beyond RUB55 per dollar would erode the competitive advantage of domestic industry. At the same time, the benefits of a strong ruble include possible modernisation of production capacities through imports of machinery and equipment (imported machinery accounts for over 40% of Russian imports), which in turn would improve the competitiveness of Russian industrial goods. "The share of imports is high in our production and numerous attempts to replace it with domestic machinery did not succeed," one IEP survey respondent said. Among the biggest benefactors of expanded exports through a weaker ruble are industries such as timber processing, extraction, and metallurgy. However, the strong ruble prior to the 2014 devaluation limited the output of only 3% of industrial producers, and took only 17th place among factors limiting output. Ruble strengthening in the first quarter of 2017 was welcomed by respondents in the industry, according to the survey. A separate survey by the Central Bank of Russia (CBR) cited by Vedomosti found that 70% of industrial producers are interested in ruble strengthening.
Russian high monetary policy rates are so high that r eal interest rates are at two-year peak as the CBR attempts to drive down inflation. That has made the ruble a magnet for carry traders after record gains last year. Now some analysts are starting to wonder if keeping investors coming back for more was the plan all along. The inflow of increasingly “hot” money chasing returns from the carry trade plays to the government plan double its domestic borrowing in 2017 to RUB1.05 trillion ($18bn) from last year’s record RUB500bn without pushing yields higher. Russia’s 10% benchmark rate has delivered the highest carry returns this year in emerging markets. Derivatives traders, meanwhile, have scaled back their wagers for a rate cut in the next three months. That has made the ruble one of the best performing currencies with a best-ever performance in 2016 when it gained 20% against the dollar. It’s up more than 6% so far this year as of February 18. The central bank’s policy dovetails with the surge in borrowing by the government this year, which MinFIn is expecting to be absorbed by domestic investors. The ruble-denominated OFZs were the second-best performing in 2016 after Brazil among emerging markets with returns of more than 35% and have brought investors gains of 8.2% in dollar terms YTD, ranking them fourth, according to data compiled by Bloomberg. The higher Russian interest rates are then the more appealing these bonds are to foreign investors and the less appealing they are to domestic investors.
63 RUSSIA Country Report February 2017 www.intellinews.com