Rouble strength ringing alarm bells

The Rouble hit fresh 16-month highs against the euro dollar currency basket on Friday, supported by oil and the carry-trade. But analysts say they are reminded of the eve of the crisis two years ago.

Déjà vu for the Russian economy. High oil prices and the strong Rouble are flirting with levels not seen since the start of the crisis.

The carry-trade boosts the Rouble – as investors borrow abroad at low interest rates and invest in Russia at higher ones. Sergey Alaksashenko from the Higher School of Economics says alarm bells should be ringing.

“Today we believe that the Rouble is on its level of autumn 2008 – pre crisis level – and this does not improve the competitiveness of the Russian economy, and this creates a huge incentive to purchase imported goods. And in a very short period of time – maybe in a year and a half or two years – that may create significant pressure on the balance of payments.”

A strong currency hurts exporting countries  – last week Japan’s lawmakers discussed a plan to devalue the yen. A bubbling oil price is the driving factor for Russia’s economy, and Vladimir Osakovsky, Economist from Unicredit Bank discounts speculation saying there are fundamental reasons driving energy demand.

“We do see GDP in the Chinese economy growing 11%, and we do see economic recovery here and there. We do see a lot of emerging markets which continue to grow during the last year for example. All of this supports the demand for oil, and its not 100% clear, I guess, how all these factors will balance out and what kind of oil prices will we see in the next several months and years.”

Analysts say, there is one drastic difference between this year and 2008 – the budget deficit. They suggest, the government should not spend the reserve fund to cover deficit- and should borrow at home rather than abroad. This would bring the Rouble down. And revenues from oil sales should again be filtered into reserve funds – just as before the crisis – to avoid pumping up the economy.