On the rouble and Russian inflation
RT: How would you describe the Rouble’s performance in 2010 and what factors drove the Russian currency during the year?
IC:“The underperformance of the rouble, particularly in 3Q 2010, was one of the key macroeconomic events. And this event was more interesting given the background of what was happening in the world, with many other emerging economies having difficulties with preventing their currencies from appreciating, while at the same time there was so much pressure on Rouble to depreciate. In our opinion, there is a number of reasons why the rouble underperformed in 2010. First, many Russian banks and companies had to meet the peak of the external redemption in December, so that these banks and corporates were actually accumulating net foreign assets. In other words, they were buying dollars in Sep, Oct and November in anticipation of this peak redemption. Second, the rouble’s weakness in FX market coincided with the change of the monetary policy at the Central Bank. In particular, the Central Bank was widening the rouble corridor and it was making its presence in the FX market much less overt. I think, this created a lot of difficulties for many market players to anticipate what the Central Bank was doing. And reason number 3, was a significant reduction of the trade balance and the current account balance of the Russian Federation that we’ve seen over the course of 2010 and that, I think, has also affected the rouble negatively.”
RT: What is the outlook for the rouble in 2011?
IC:“We think, that going into 2011 many of the mentioned factors will gradually fade away. We think that the short term increase in external payments in December will disappear at the end of December and the external redemption schedule of the Russian Federation looks much easier in the first 2 quarters of 2011. Second, market participants are getting much more used to what the Central Bank is doing and, I think, it’s clear today that the Central Bank of Russia is moving away from targeting the exchange rate and it’s becoming much more serious on targeting inflation. And finally, given our forecast, with the oil prices going higher in 2011, we think, that exports will be considerably better in Russia in 2011. We also think, that the kind of surge in imports, that we observed during this year, will not be as big a factor in 2011. So, a combination of these 3 reasons argues for a stronger rouble in 2011. Talking in particular numbers, we think that rouble will strengthen against the basket to 34 by June 2011. So, we do prefer the rouble a lot, and this particular trend with the rouble being longer against the basket will be one of the top trades globally in 2011.”
RT: What impact is WTO accession likely to have on the rouble?
IC:“I think that the significant progress that Russia has made regarding its WTO accession is probably one of the most important political economic developments for Russia, and this success was mostly achieved thanks to the interest of Russian authorities. As for the effects the WTO accession might have on the rouble rate, I don’t think, that will be any significant impact in the short term. I don’t expect any significant inflows coming into Russia because of the accession in 2011, or even in 2012. I think, we might see any positive effects over a medium to longer term period. ”
RT: Russia is making moves to enable trading between the rouble and other currencies – starting with the Yuan – How significant is this likely to be, and what implications does it have for the rouble?
IC:“I think, it won’t have a great effect on the Rouble. As far as I understand, the quantities are very small – that’s number 1. Second, this trade happens for a very short period of time during the day – about an hour or two. I think, that’s an important symbolic move. Both Russia and China are gradually starting to elevate of their currencies internationally and this is a step in this direction.But I do think that’s mostly a symbolic move, as there is a long time to pass until the American currency moves away. What the Russian authorities are struggling to achieve is to increase the attractiveness of the Russian currency – not so much globally, but at least regionally. And, I think, this is probably currently one of the top goals of Russian authorities, as far as the rouble is concerned, which I take as a step in the right direction.”
RT: Inflation has been rising since mid year, what have been the driving factors?
IC:“I think, that inflation was clearly, almost 100%, driven by the food price shock that was caused by this summer drought. If you look at the inflation outside the food sector, this stayed pretty much constant during the year, in other words, we didn’t have a significant spill over effect from the food prices to the non food prices.
Going forward into 2011, I think, we’ll continue to see the impact of the food shock on the overall inflation. I think, that is going to be the case until May or June next year and in 2H of 2011 the headline CPI index will start to moderate and ease. And at the same time, I think, there’s a lot of pressure right now on the Central Bank to do something about it, in particular because 2011 is a pre election year and for the Russian authorities it’ll very important to keep any possible social unrest in check. And that’s why, I think, keeping inflation in control will be very important.
And if you believe my story that food prices were driving inflation, I think, it’ll be relatively easy for the authorities to do something about it. They can unload the significant grain reserves that they have accumulated during previous years, and according to Putin’s announcement, the Russian Government is going to release about 1.3 million from the grain reserves to fight the food inflation and, I think, that’ll be another dampening factor. So, I don’t really worry about inflation. The economy now isn’t overheating and the inflation is caused by a food price shock, with the Government having enough tools to fight that.”
RT: So, you think that the inflation was mostly driven by non monetary factors?
IC:“Though there really was a double digit increase of the monetary base, in the recent months the growth rate started to fall. And for me the most important thing is to look at what’s happening outside the food market, where prices aren’t really growing. That’s why I wouldn’t worry about inflation until we see the growth in those non food items.”
RT: In terms of particular figures, what are they for inflation in 2010 and 2011?
IC:“The average inflation for this year would be 6.8-6.9 % and in 2011 it’ll rise to a little bit above 8%. But it’s important to remember about the shape of inflation, because inflation, I think, will be accelerating during 1H of 2011 in line with food prices, but then, I think, the trajectory of the inflation will be falling. So, next year I expect an inverted V –shape trajectory for inflation, with the prices growing until May-June and then again falling From June to December.”