Page 60 - RUSRptApr17

finance minister considers 64 as fair value.
Also in March, the Central Bank (CBR) moved from a previous very hawkish position to cut its key rate by a modest, but still meaningful in policy terms, 25 basis points. The price of oil also fell by 5%.
All of this should have suggested a perfect storm against the ruble and it should now be trading above 60 against the dollar. But on April 4 the exchange rate was slightly up at 56.5 and looking unsure of which direction to move next.
It seems clear that the ruble will continue to trade at well off the 60 mark
(against the dollar) over the short to medium term. Yet despite previous comments in support of a weaker exchange rate, this may also suit the government. While the weak ruble is considered critical for economic competitiveness, it is a fact that companies are struggling to pay for imported equipment and technology. A period of ruble strength will open a window for more competitive imports.
Macro-Advisory is keeping its year-end target ruble-dollar exchange rate at 62.0, based on an average oil price of $54 per barrel (p/bbl) and no change in sanctions. But the exchange rate will be more volatile than expected and we will be paying close attention to any indication of a more permanent shift in the government’s view of what is the optimal exchange rate.
In July 2016 Putin expressed concern that the ruble was “too strong” in a public meeting with Prime Minister Dmitry Medvedev. The exchange rate the day before was at 62.85 and ended that month at 66.98. Since then the ruble has appreciated by almost 20%.
The culprit for defying the president’s wishes back then was the oil price ; it rallied 25% between mid-July and year-end, albeit almost all of that came as a quick reaction to the surprising Opec agreement to cut production. The credibility of that deal was enhanced, if not actually established, with the strong political support for the deal from Russia. So, to a large extent, the Kremlin only has itself to blame for the ruble running away from the president’s clearly stated preference.
Historically we could justifiably blame the oil price for the direction of the ruble exchange rate, that is not the case today, and it has not been through the past quarter. The price of oil fell 5% in March, while the ruble gained 3.5% against the dollar. Since the start of the year the ruble is up 9% while oil is down almost 6%. It means we have to look elsewhere for the explanation for the ruble’s rally and, from that, to ask whether we now need to reassess the factors we use to predict the future path of the exchange rate.
One of the reasons why economists have been so convinced that the ruble should trade at no higher than 60 against the dollar is because this is the approximate level the president and government ministers have indicated as being key, if not actually critical, for so-called localisation to work.
Localisation is the strategy identified by government as offering the best option to rebuild, and sustain, economic growth near the targeted 4%. The objective is to attract investment into industries such as manufacturing and agriculture, which will lead to diversification in the domestic economy and,
60 RUSSIA Country Report April 2017 www.intellinews.com