Page 21 - IFR Opportunities in Russian capital markets

CHAPTER 01
ifrintelligence reports/Opportunities in: Russian Capital Markets
Figure 1.9: Russian inflation, 2003–09F (%)
RUB per US$1 32
30
28
26
24
22
Inflation, % 20
15
10
5
Ruble/US$ ratio, ave 0 Inflation
Source: Ministry for Economic Development & Trade
2003 2004 2005
2006E
2007F
2008F
2009F
Ruble appreciation, currency controls and de-dollarisation
The ruble has almost become a hard currency in the last few years and has been appreciating in value rapidly. Real ruble appreciation in 2006 was 7.6%, inside the CBR target of 9% and well below the 10.5% real appreciation the national currency saw in 2005.
Economic Development and Trade Minister German Gref says that the ruble will appreciate by 4–5% in 2007 and will start losing ground to the dollar by 2010, according to the Ministry's forecasts. The average annual rate of the ruble will be RUB26.1 to the dollar in 2007 and 2008, RUB26.4 to the dollar in 2009 and RUB27 to the dollar in 2010, says the Ministry.
While the growing value of the ruble is a problem for the authorities, the fact that the bulk of Russia's exports remains raw materials means that Russian firms have yet to suffer much pain from the rising value of the ruble. The increasing value of the ruble is also sucking in increasing amounts of imports, but the value of exports still exceeds imports by a handsome margin.
The Kremlin accelerated plans to make the ruble a fully convertible currency in 2006, removing the last of the currency control restrictions on 3 July 2006.
Foreign investors willing to buy assets denominated in the Russian currency will not be subject to any regulatory restrictions, such as interest-free deposits with the CBR, and will not have to deal with the complicated system of multiple accounts that had been previously in place.
Currency flows
According to the currency control legislation, introduced in 2003, the CBR has the right to introduce restrictions (in the form of reserve requirements) to defend the balance of payments' stability and preserve the country's international reserves. This aims to limit 'hot money' flows and prevent the destabilisation of the local market in the event of turmoil in world capital markets. Effectively, this implies additional taxation on external capital transactions.
By the start of 2007 Euronext, the European stock exchange, had set up a system to allow clearing of ruble-denominated deals, in preparation for the ruble entering the international FX markets – although by the end of February not a single deal had been transacted.
Probably the best testament to the growing confidence in the ruble is the almost wholesale de- dollarisation of the Russian economy. Holding hard currency has always been a typical hedge against inflation (and a capital offence in Soviet Russia). The US government was forced to fly plane-loads of US$100 bills to Russia in the 1990s to keep up with the demand for cash.
However, at the end of 2006 the Russian public converted US$7.7bn worth of dollars into rubles and deposited them in bank accounts, setting a new monthly record. Economists say that the process of de-dollarisation began in about March or April in 2006 and had been gathering momentum all year.
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