Page 61 - RUSRptApr17

critically, exports, away from the current dominance of hydrocarbons and other extractive industries. The key to localisation is the ability to attract investment into these industries and the key to that is maintaining competitive economic conditions, of which the weak ruble is at the very core.
Many industries have been complaining that the weak ruble makes it too expensive to import equipment and services to build the factories demanded by the government’s localisation strategy. As a result, the process has been moving far too slowly. This period of ruble strength will allow many to lock in better import price terms.
A recent poll by the Institute of Economic Policy showed that a majority of companies which need to buy equipment to expand both domestic and export sales would be satisfied with a ruble-dollar rate at 54.0 a s a compromise between export competitiveness and the need to buy equipment. A broader survey, i.e. not only those who need to import equipment, carried out by the Ministry of Trade and Industry showed that 30% of respondents would be happy with a rate between 60 and 64; 17% would prefer a range of 65 to 69; and 15% would be happy to see the rate between 70 and 74. Only 20% expressed a preference for a rate between 50 and 56 against the dollar.
In reality there is no quick fix and, despite the political preferences, it appears there is no firm strategy either . If the ruble does move back above 60 against the dollar later in this quarter, as is the consensus view, it will be because of a combination of factors rather than as a result of one action from government. But what is at stake is clear: if the ruble strengthens too far then the economic recovery – which has been driven by such sectors as agriculture which have specifically benefited from the weak currency – may stall; if, on the other hand, the ruble weakens again too quickly, then the very manufacturer's upon which localisation and future growth relies will not be able to justify investment.
Support for the ruble from the BoP after end 1Q17 remains questionable. According to our estimates, seasonality, combined with an expected recovery in imports, assumes a contraction in the current account surplus to $4bn in March and levels close to zero during the other three quarters of the year. At the same time, net capital outflow due to foreign debt redemptions could pick up to $5-10bn and average about $5-7bn per quarter in 2Q-4Q17.
In view of these factors, Gazprombank has set YE2017 RUB/$forecast 61, although we would not rule out another bout of temporary weakness in the range of 60-65 during 2Q17. Furthermore, the recent negative news flow surrounding oil prices and Fed policy, combined with a lack of improvement in the geopolitical backdrop involving Russia, could prompt us to downgrade this outlook. To remind, the fair value range for the ruble stood at RUB/$65-75 based on fundamental estimates in early 2017.
Also noteworthy is the abnormally strong growth of CBR reserves in February as another uncertainty factor impacting the FX market. According to our estimates, while a nominal $12.9bn increase in reserves in January was attributable mainly to the revaluation of non-$FX reserves and gold, February’s $6.7bn upturn in international reserves fully reflected a physical change in reserves (see Table 2). Furthermore, as noted above, the redemption of FX repo by banks and the purchase of FX for the MinFin together account for only a $2.3bn increase in reserves. As a result, even including $1.6bn in gold
61 RUSSIA Country Report April 2017 www.intellinews.com