About the Strong Ruble and the “Dutch Disease Growth” for Russia

NEW – July 18, 2022

The exchange rate of the Russian ruble against the US dollar and other fiat currencies of the “golden billion” countries continues to grow, which is considered by many representatives of the authorities and large businesses as a potential threat to the national interests of our country.

They say that an excessively strong ruble will make imports cheaper for us, and exports, on the contrary, more expensive, as a result, the competitiveness of domestic goods and services will decrease both in the foreign and domestic markets, enterprises will begin to close, unemployment will grow, and the economy will collapse. In general, the “Dutch disease” is coming, which in its consequences may be more dangerous than the COVID-19 pandemic, and therefore it is urgent, before it is too late, to take a set of measures to weaken the ruble in order to return it to the “comfortable” range for our economy, according to most experts, 70-80 rubles per dollar.

Undoubtedly, there is some truth in such fears. But only a fraction, and not a very large one at that. First of all, we are talking about the degree of undervaluation of the Russian currency, which is traditionally extremely large. Thus, with GDP in 2021 of 131.015 trillion rubles and an average annual exchange rate of 73.6824 rubles per dollar, the nominal volume of the Russian economy is determined at the level of 1.778 trillion dollars. The same indicator calculated by purchasing power parity (GDP PPP) in 2021, according to the IMF, amounted to 4.49 trillion dollars, and according to the World Bank – 4.785 trillion dollars, i.e. 2.5-2.7 times more. Thus, the exchange rate of the ruble – even taking into account the lower level of monetisation of the Russian economy relative to the American one (approximately 50% to 94.1%) and the lower speed of money circulation – is significantly underestimated. Not by 2.5-2.7 times, but about twice as accurate. That is, the “equilibrium” exchange rate today should be in the range of 35-40 rubles per dollar. Anything above this range is a “premium” for Russian exporters and foreign importers. As well as our government, which has traditionally used and still uses part of this premium as an extra-budgetary “welding” to its income and expenses with the help of various tools. This is the first point, and it’s no secret.

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Second. The current Russian economic system is characterised, and it is also no secret, by a surplus in the foreign trade and balance of payments. Thus, in 2021, the trade surplus amounted to $198.16 billion, and in the first half of 2022 — $158.4 billion. And in normal economic conditions, these figures could be considered evidence of high competitiveness and success. But today, in the regime of “infernal sanctions” imposed by the countries of the collective West against Russia, these formally gigantic export revenues make it difficult to purchase the goods and services that our country needs in the proper range and volume on the foreign market. In other words, domestic raw materials are delivered abroad on terms of inadequate and non-equivalent exchange, without full payment, since the funds formally received in the framework of trade as usual are subject to the risks of freezing, withdrawal and restrictions in use.

Thus, and thirdly, Russia’s special military operation for the demilitarisation and denazification of Ukraine contributed to the fact that the previously hidden reefs of the “global market” were exposed, and the real relief of this bottom was no longer hidden by the tide — or rather, a tsunami — of currency, primarily dollar, emissions. There seems to be a lot of money, but in some markets it’s not possible to buy anything for it. This extra-economic sterilisation of the money supply leads to higher prices both for the markets of the collective West and for the Russian market. As a result, inflation in both countries is estimated in double digits, but in our country, due to the growth of the ruble exchange rate multiplied by currency inflation, a fairly wide range of import-dependent goods and services in terms of dollar equivalent has gone to a completely different accessibility sector. If a year ago the market price of a kilogram of imported pears was 150 rubles or 2 dollars (at the rate of 1 dollar = 75 rubles), today it reaches 300 or more rubles or 5 or more dollars (at the rate of 1 dollar = 60 rubles). That is, the already considerable increase in the ruble prices of goods that have become a shortage in terms of currency becomes simply exorbitant. This is just a typical symptom of the “Dutch disease”, manifested in the service industries.

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But it should be said that from this very “Dutch disease” no one anywhere has ever died. All the more so in the context of a growing gap between the supply and demand of goods in demand on the world market, which today increasingly include energy carriers, other raw materials and food (that is, the main items of Russian exports). And in the current situation, Russia’s problem is the transition from one economic model (export-raw materials) to another (investment-mobilisation). In other words, it is necessary to treat not the symptoms by lowering the ruble exchange rate and stimulating a foreign trade surplus, but the cause of the disease (investing money in a network of new high-tech industries and infrastructure development, including education and health systems, changing the structure of the distribution of national income in favour of greater social equality).

Those who now frighten Russia with an increase in the “Dutch disease” want to preserve the previous economic model. But this model has already played its role, and today it is increasingly becoming a dead end. The “Dutch disease” — just like the very painful special military operation — can and should turn out to be a “growth disease” for Russia. Therefore, the “treatment protocols” will have to be used completely different from what is usually prescribed in order to return to the norms of the “global market”. In particular, for example, it is worth thinking about how, instead of forcibly weakening our national currency, on the contrary, to strengthen it through monetary reform with the denomination of the ruble — at least after the completion of the consolidated budget, which, we hope, is not far off and will be in favour of Russia.

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Oleg Shchukin

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