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52 Opinion bne August 2023
The ruble has been on a losing streak since December 2022 as the finance ministry lets go of the currency to protect the budget deficit. / bne IntelliNews MACRO ADVISORY
Ruble sacrificed to protect the budget
Ben Aris in Berlin
Positive trend in GDP. Over the past month, two developments have stood out. One was expected and the other was not. The first is a strong bounce in the economy evident in the latest statistics. All major parameters have shown significant spikes in year-on-year terms – from GDP to industry, construction, retail sales and personal incomes. That was a widely expected shift driven by the
base factor.
Ruble moves to the RUB80-90/$ band. The other development is a surprise: the ruble lost RUB10/$. As a result, the ruble’s trading corridor moved from RUB70- 80/$ to RUB80-90/$. This now appears to be the new reality for the struggling domestic FX market. Ruble devaluation will increase financial instability and is certain to strengthen the already rising inflationary risk in the coming months.
Budget support is now the top priority. The traditional key topic on the government’s mid-summer economic agenda
www.bne.eu
is the budget-planning process. However, this year the budget discussions are being held in secret. The news that is filtering through shows that the main concern is to bring federal finances into balance without spending much of the accumulated reserves.
Implications for taxes and spending. The discussion is about budget consolidation. This implies the use of all available means to boost revenues, such as additional taxes (all areas) and a search for politically “safe” ways to cut spending.
Strong consumer sector recovery. Another important development is the quick recovery in domestic consumer demand. The expansion of public spending on salaries, pensions and funding for the military was a prime driver behind the reversal in the real wage growth trend. This trend is also supported by long-term structural shifts in the economy, such as the tightening of the labour market on the back of poor demographics and declining migrant inflows.