(7 October 2020)  The depreciation of the Russian ruble by 26 percent against the US dollar since March 2020 directly relates to a reduction in the trade balance and capital outflows by the private sector in the wake of anti-COVID lockdowns and a drop in global energy demand and prices. Analysis of the monthly balance of payment statistics from the Central Bank of Russia suggests the outlines of a new equilibrium for the ruble:

  • Russia's current account balance since April has shrunk to zero.
  • At the same time, the Russian Central Bank has cut the policy rate from 6.25 percent to a record low 4.25 percent, which has in turn lowered returns on foreign short-term investment into Russian debt securities and contributed to the outflow of capital to the tune of $4-5 billion per month.
  • Without further intervention from the Russian Central Bank, we estimate that foreign currency flows will rebalance if imports decrease by $4 billion per month, which equates an exchange rate of about 85 rubles per $1 (assuming each 1% depreciation of the ruble corresponds to a 1% decrease in imports).

As a policy matter and economic imperative, the Russian Central Bank has sufficient foreign exchange reserves to prevent the weakening of the ruble to 85 rubles per $1. Despite 30 percent YoY decrease of exports during the March-July 2020 period, Russian foreign exchange reserves grew to a record $595 billion by the end of August 2020, mainly due to the increase in gold prices.

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