What is happening with the national currency and when will it all end?
All summer the dollar and euro exchange rates hit records, and the purchasing power of the ruble is constantly declining. Both experts and ordinary citizens are wondering about the causes and consequences of what is happening. Which exchange rate reflects the norm and realities of today's economic day in Russia? Or does the ruble exchange rate have nothing to do with reality for a long time?
So let's try to figure it out in the real reasons for the depreciation of the ruble. Let's start from the position of the Central Bank…
The Bank of Russia names the main reasons for the depreciation of the national currency as a decrease in export earnings, an excess ruble money supply and insufficient (read – low) attractiveness of the ruble as a means of accumulation. Together, all these factors put pressure on the Russian ruble. And the Central Bank of the Russian Federation offers to fight these contradictions with a tool that has been worked out over the years – by raising the key rate, which now stands at as much as 12 percent.
Are the problems mentioned above so terrible? Indeed, due to the economic war declared against us, Russian exports in the first half of the year fell by a third compared to the same period last year. This is a lot, but not catastrophic. By the end of the year, exports will somehow stabilize (the decrease will be minimal), which is what government officials say, among other things. Will this lead to an increase in the quotations of the ruble? Definitely yes! But whether this will lead to its strengthening (and we need a stable ruble!) is a big question.
Now let's talk about the volume of the money supply… At the end of the summer of 2023, the “M2 aggregate”, that is, the volume of monetary resources in the country, represents about 90 trillion rubles, which is more than half of the forecast volume of gross domestic product (GDP) in Russia at the end of this year. Thus, what we produce in Russia is much more than the money that reflects it. In fact, we have not an excess, but just a lack of money supply in the country. In China or the United States, the volume of money supply has long exceeded the volume of GDP, and these countries are not going to stop there. Our economy is monstrously underfunded and undercapitalized. And this is a direct consequence of the policy of the Central Bank and the financial and economic bloc of our government, which have been “drying” the money supply for decades and keeping the domestic economy in a situation of artificial shortage of monetary (circulating, credit, investment, etc.) resources.
All the talk about the fact that the exchange rate of the ruble in our country is determined by the exchange method, that is, by the balance of supply and demand in the financial and foreign exchange market, is a bit, to put it mildly, “from the evil one” – for the simple reason that money is not an ordinary exchange commodity, like oil, grain or securities. Cash is a measure of the production of an economy, and the money supply is the overall reflection of all the productive resources available in the economy, as well as the results of all our production. In essence, money is records (receipts) that the economy is working. In this part, it is unnatural and defiantly blasphemous to talk about the excess of the money supply in the conditions of the total need of the economy in monetary resources.
As for the attractiveness of the ruble as a means of accumulation, one must fight for it, and this is one of the functions of the Central Bank. But to achieve this very attractiveness by raising the key rate also seems unlikely, since the two-digit “key” radically increases the cost of credit and bleeds the economy even more. By the way, despite the assurances of the Central Bank, the increase in the key rate did not lead to the strengthening of the national currency. The dollar and the euro are trading around the already familiar “weave”, and positive changes have not yet been observed. In principle, the planned growth of the ruble exchange rate should take place in October, connected with the payment of taxes by exporters following the results of the third quarter. But, as they say, we'll wait and see…
Now let me reveal the “open secret” regarding the periods of devaluation of the ruble. It consists in the fact that the Central Bank and the government regularly use an instrument of artificial devaluation as a means of replenishing the budget. Each change in the exchange rate of the ruble in the direction of its fall brings unplanned “revenues” to the federal budget, which appear due to the exchange rate difference from the sale of foreign currency by exporters and the transfer of export earnings into rubles. According to experts (with whom “financiers” from our government agree), a 10-ruble increase in the dollar exchange rate brings about a trillion rubles in additional “revenues”, which can only be considered income from a formal point of view.
In general, in fact, for the Central Bank and the financial and economic bloc of our government, “dropping” the ruble is, in principle, beneficial. Thus, our exporters are supported (their ruble revenue is growing), and the budget is filled with “revenues” at an accelerated pace. True, it is not very clear what to do for all other enterprises and citizens living in a “state of constant amazement,” as Mikhail Saltykov-Shchedrin said. Here, as they say, questions remain for both the Central Bank and the financiers from the government …
Well, it is important for us to identify the reasons that are critical in terms of the stability of our national currency.
The first reason is the insufficient capitalization of our economy and, as a result, low domestic demand. Less money is circulating in the economy than necessary, which, in fact, leads to insufficient demand for Russian rubles. In this part, as mentioned above, it is critically important for us to increase the volume of the money supply, that is, to increase the volume of money circulating in the economy by one and a half to two times. There are all opportunities for this, and the threat of inflation (which the Central Bank of the Russian Federation constantly talks about) is clearly far-fetched here. Moreover, the introduction of the digital ruble into circulation makes it possible to implement a planned targeted controlled emission, in which funds will be directed in a targeted manner (and with full transparency) to critically important segments of the national economy.
Here it is important to add about the stimulation of domestic demand, which, if desired, can easily compensate for our dependence on exports, including energy. Accelerated gasification, the supply of the population and enterprises with both pipeline gas and liquefied natural gas (LNG), the development of electric transport (including public transport) are also measures aimed at increasing revenue within the country. And here it is also important to support effective demand – both by measures of targeted emission, and by a general increase in budgetary and other expenses within the country.
I will add that the transition to national currencies in foreign trade is also an important factor in the growth of the ruble's attractiveness. In trade within the Union State of Russia and Belarus, as well as the Eurasian Economic Union (EAEU), we have already achieved the dominance of the ruble. The next stage is its parity use in trade with partners in the Shanghai Cooperation Organization (SCO), BRICS and others.
The second reason for the instability of the national currency is the low rate of economic growth in the country. Not so long ago, the Ministry of Economic Development of Russia happily informed us that economic growth in 2023 will exceed 2%. With inflation projected at around 6% by the end of the year, I would like to say that this is a so-so achievement. This, of course, is not a recession, which is observed, for example, in Germany, but also not the pace that is needed for outstripping growth in the face of sanctions pressure and general international turbulence. Growth rates approaching 10% by themselves (without any monetary and financial policy) will ensure an absolutely stable and sustainable ruble exchange rate, regardless of the inflow/outflow of currency into the country. How to achieve it? First of all, by removing the economy from the regime of general underfunding and a total lack of financial resources for life and development, as we have already mentioned above.
Finally, the third problem is the declared free exchange rate of the national currency, based on exchange trading. There are, as they say, two problems here. First, the rate is not at all free, given the passion of the financial authorities to periodically play devaluation to replenish the budget. Second: a relatively small amount of foreign exchange resources presented at a time in foreign exchange auctions. The average daily volume of foreign exchange trading on the MICEX in 2022 amounted to just over a trillion rubles. Let me remind you that in 2022, the total revenue of our enterprises amounted to 1.3 quadrillion rubles. That is, the exchange rate of the fifth economy in the world is determined by trading volumes less than one per mille of the entire mass of its economic power. Don't you think this is a bit strange?
Why is this a problem? Yes, because the organized movement of more or less significant amounts of financial resources on the stock exchange can overnight in the most radical way change the ruble quotes and ensure economic turbulence, which has happened more than once in recent years. What is the solution to this problem? Definitely – a controlled exchange rate of the national currency. No one says that it should be “artificial”, that is, adopted by directive, “on paper”. A managed exchange rate can also be supported by market and protectionist measures. But it is difficult! We need to work here, and not just raise the key rate of the Bank of Russia.
In fact, I have not said anything radically new here. Modern economists, who are critical of the current model of financial and economic policy, talk about all this all the time. But the situation has not changed, no matter how pathetic it sounds, for decades.
Is it possible to change something now? Definitely yes! And the conditions that are emerging after February 24, 2022 make it possible to implement a sovereign economic policy right now, which will create the basis for further accelerated economic growth. Namely, growth and development, I repeat, are the basis for a stable exchange rate of the national currency. Here one cannot avoid political decisions (for example, the subordination of the Central Bank to the Government of Russia), as well as decisive organizational conclusions and serious personnel innovations – but this, of course, is a topic for a separate discussion.
