Russian officials warn of challenges posed by strong rouble
Summary
Rouble will remain strong, economy minister says
Export-oriented firms may suffer losses
The government will review exchange rate forecasts in April
Officials urge companies to adjust to stronger rouble
MOSCOW, Dec 2 (Reuters) - The Russian rouble will be stronger than previously expected, posing a significant challenge to the economy. Several major export-oriented mega projects are at risk of incurring losses due to this development, according to top Russian officials. The rouble's surge, driven by the central bank's tight monetary policy and hopes for a peaceful resolution in Ukraine, has already rallied by over 46% since the start of the year. This trend is expected to continue, impacting the revenues of Russian commodity firms that export oil, gas, metals, and grains, and contributing to the state's tax revenues.
Initially, analysts and businessmen anticipated a weaker rouble, estimating its fair value at around 100 to the U.S. dollar, compared to the current rate of 77.5. However, these expectations have not materialized. Economy Minister Maxim Reshetnikov attributed the stronger rouble to weak imports and capital outflows, emphasizing that companies must adapt to this new reality.
The government's import substitution policy, aimed at countering Western sanctions and replacing Western equipment, is also contributing to the rouble's strength. This policy has led to a shift in the government's exchange rate forecast for 2026, from 100.2 to the dollar to 92.2. Reshetnikov highlighted that several large export-oriented projects, targeting export volumes of up to $70 billion, may become unprofitable at the current exchange rate, necessitating their abandonment.
Specific projects at risk include Sibur's Amur gas and chemicals plant in the Far East, Gazprom's gas processing plant in Ust Luga on the Baltic Sea, and billionaire Alisher Usmanov's Udokan Copper project. Reshetnikov cautioned that the strategy of waiting for the exchange rate to weaken is no longer viable.
The central bank's Governor, Elvira Nabiullina, noted a significant increase in the rouble's share in payments for Russian exports, from 14% in 2021 to 57% this year. The rouble's dominance in import payments has also risen to 55%.
The rouble's rate to the dollar is determined through an opaque over-the-counter trade between banks. Andrei Kostin, CEO of Russia's second-largest bank VTB, expressed that the current rate is unfavorable for both exporters and the government, as demand for foreign currency has plummeted, even among ordinary citizens. Maxim Oreshkin, President Vladimir Putin's economy aide, attributed the falling demand to cryptocurrency mining, which provides an alternative payment method for imports.
Oreshkin also highlighted government decisions limiting imports, such as increased scrappage fees for foreign-made cars and measures against gray imports from Central Asian states. Despite these challenges, foreign investors are finding opportunities to invest in high-yielding Russian assets, such as government bonds with yields around 13%, contributing to a capital inflow that supports the rouble.
Oreshkin concluded that if the government seeks a weaker rouble, it must implement aggressive policies to increase imports. However, he currently does not see such a strategy being pursued.
