July 13, 2013 / 12:59 AM / 4 years ago

Russia embraces weaker rouble as fiscal panacea

MOSCOW (Reuters) - Russia’s Finance Ministry embraced a weak-rouble policy as it seeks to revive flagging economic growth, but while the approach may boost revenues there is a risk that inflation could become entrenched.

Minister Anton Siluanov’s call for a weaker currency follows a series of meetings chaired by President Vladimir Putin, who has pressed the government to meet spending promises made on his return to the Kremlin in May 2012 in the search for more growth.

The $2 trillion economy, the world’s ninth largest, grew by 1.6 percent year-on-year in the first quarter of this year - its slowest since 2009. Weakness ran into May, with industry output shrinking by 1.4 percent from a year earlier.

But the International Monetary Fund again urged Russia on Tuesday to keep spending in check, fight inflation and accelerate reforms aimed at creating a broader economic base rather than manipulating demand or the currency.

“There is no point in monetary or fiscal stimulus,” the IMF’s mission chief for Russia, Antonio Spilimbergo, told a news conference after an annual visit.

“The economy is running at full capacity. A weaker rouble will not boost the economy.”

Moscow has made scant progress in developing a manufacturing base to diversify away from relying on its mineral wealth, weighed down by a nominal exchange rate that has remained stable while wages and the cost of living rise faster than elsewhere.

Weakening the rouble would help exporters in that battle while also encouraging domestic producers in the vast, resource-rich country to compete on price with imports.

It would also benefit the budget through the higher return from oil exports, with a one-rouble decline in the exchange rate to the dollar overall worth an estimated 190 billion roubles ($6 billion) in annual revenues.

“The Finance Ministry would accept a certain weakening of the rouble’s exchange rate, but only as long as it is driven by the market and not by administrative methods,” Siluanov told Reuters.

The rouble has fallen by more than 5 percent in the year to date to 36.92 against the dollar-euro currency basket targeted by the central bank. It weakened further following Siluanov’s comments.


The government last year introduced a so-called fiscal rule, capping new borrowing at 1 percent of gross domestic product, making it hard to ramp up spending in an increasingly desperate struggle to revive growth.

The central bank has held off from easing monetary policy because inflation, at 7.4 percent, remains above its 5-6 percent target range. Putin’s dovish economic adviser Elvira Nabiullina takes the helm next week, possibly heralding interest rate cuts.

Siluanov said, however, that he saw no place in Russia for western-style monetary stimulus, where central banks buy up government bonds to lower the cost of credit to the wider economy.

“There is no need at the moment to implement a policy of so-called quantitative easing, as is being done in other countries, as this could stoke inflation further,” he said.

Those comments sought to put an end to a debate in Russia on widening the mandate of the Bank of Russia to add promoting economic growth to its existing task of defending the stability of the rouble.

Economists said a weaker rouble could bolster the public finances without jeopardising financial stability, as Russia’s foreign debts are low. But they doubted there would be much of a positive impact on growth.

“A weaker rouble is likely to help improve fiscal performance in 2013 and beyond, but may not be so promising for economic acceleration in general,” Julia Tsepliaeva, economist at BNP Paribas in Moscow, said in a note.


The Finance Ministry is laying the ground for a shift in how it handles oil export revenues - a key part of its revenue base. Energy levies account for around a half of the federal tax take.

In the past, dollar-denominated revenues would be converted into roubles in off-market operations and deposited in the ministry’s budget Reserve Fund and the National Welfare Fund, which are together worth 5.4 trillion roubles ($170 billion) and are held at the central bank.

From August, these dollar revenues will be transferred directly to the central bank, obviating the need for the central bank to conduct market operations to mob up rouble liquidity.

“This is a zero-sum operation from the point of view of buying and selling currency,” Siluanov said. “The Finance Ministry thus neutralises the effect that currently results from filling the Reserve Fund from oil and gas revenues.”

Under the new fiscal rule, the Reserve Fund effectively functions as an off-balance-sheet fiscal buffer, being topped up when oil prices are high and drawn down when they are low. It is now worth around 4 percent of GDP.

A weaker rouble would also have the beneficial impact of unwinding its real effective appreciation - which has totalled 56 percent since 2004 - forcing up business costs and making it hard for them to compete against imports.

“Over the past 10 years the nominal exchange rate of the rouble has hardly changed, and prices have risen strongly,” said Siluanov. “The resulting real effective appreciation of the rouble has had a negative impact on Russian exporters.”

Writing by Douglas Busvine; Editing by Patrick Graham

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