Rouble tipped for strong rise over three years

Russian Deputy Economy Minister Andrey Klepach has forecast the Russian currency could appreciate by as much as 20% over the next three years.

Referring to the Central Bank of Russia’s policy of winding back currency interventions the Deputy Economy Minister, speaking at a Moscow conference on Tuesday, warned about the possible implications for the economy.

“From the point of view of the economy, the rouble shouldn’t strengthen like this,” Klepach said, adding “We are not ready to move to a floating ruble.”

Klepach maintained the central bank should actively intervene in the currency market to stop the Russian currency appreciating too quickly, noting that with the effects of inflation stripped out the rouble was now stronger than it had been prior to the economic downturn.

The comments come after the Russian currency rebounded by up to 20% against the US dollar in 2009, buoyed by energy and commodity prices, after having been allowed to depreciate by 35% between November 2008 and January 2009.

Yaroslav Lissovolik, Chief economist at Deutsche Bank, backed Klepach’s view on the Rouble agreeing that the outlook for crude prices and the less interventionist role flagged by the Central Bank of Russia point to the likelihood of appreciating

“I think, this forecast is quite a realistic one and there are two major reasons for that. First, it’s the course for a more liberal monetary policy, with a more flexible exchange rate. And second, it’s rising oil prices that push Rouble up.”

Danila Levchenko, Chief economist at Otkritie FC, believes that with the Central Bank retaining the capacity to intervene in the market, political considerations are unlikely to allow the Rouble to appreciate as much as the Deputy Minister has warned about.

“I don’t completely agree with the official forecast. Today we don’t have a free floating currency and any decision is mostly a political one. There are different lobby groups in our government, with one of then targeting at a stronger Rouble to attract more foreign investment and others seeing a weaker Rouble as a way to stimulate Russian economy. And, I think, the future of the Rouble depends on which party wins.”

Despite the central bank’s adoption of a less interventionist approach, Lissovolik does not believe the Russian currency will be floated in the short to mid term.

“To my mind, Russia’s Central Bank isn’t yet ready to let Rouble free float. It’s necessary to prepare both households and companies for high volatility. I mean, it should be done more gradually, with Rouble appreciating step by step each year. And a complete free float will take more time, I think. ”

The psychology of moving to a free floating rouble also has Otkritie FC’s Levchenko saying it isn’t likely to come any time soon.

“The main question here is to whether the country is psychologically ready for it. And today we are still too dependent on the commodity market, which makes Russia unlikely to have its Rouble free floating any time soon.”

Levchenko noted that significant rouble appreciation would have lead to other significant problems for Russian macroeconomic management.

“Such a growth would lead to the inflow of speculative capital and create a lot of various bubbles in Russia’s economy and its financial markets. Of course, high inflation would also be one of the consequences.”

Lissovolik added that manufacturing and import competing sectors of the economy would be likely to bear the brunt of any significant Rouble appreciation.

“A stronger Rouble will damage economic competitiveness and some income items in the Federal budget. Moreover, it will slow down the recovery in manufacturing.”

Despite warning of the risks of allowing the rouble to appreciate too quickly, Deputy Economic Minister Klepach suggested that the economy could grow this year by about 4-4.5%, higher than the official forecast of 3%. The economy Ministry estimates that Russian GDP rose by 5.2% in January after contracting by 7.9% in 2009, with Industrial production up by 7.8% according to the Federal statistics service.

Danila Levchenko forecast that the cvurrency for the short term would be likely to stay close to where it is against the US dollar, with the strength of any economic rebound likely to dictate its appreciation over the longer term.

“Short term, I think, it’ll be stable and remain at 29 – 30 Roubles per Dollar until the end of 2010. A longer perspective largely depends on the pace of economic recovery. If the economy recovers at a high pace, than appreciation at, say, 10% at the maximum will be quite possible and comfortable for the Russian economy. ”

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