In 2016, the ruble rose by 17% against to the dollar and by 19.8% against the euro, demonstrating one of the best results among the currencies of the developing countries. In order to find out whether this positive trend will continue in 2017, I will conduct a review of the key macroeconomic factors that have a long-term impact on the ruble price.
Ruble Vs. Oil
As of Q3 2016, oil accounted for 44% of the Russian exports, in comparison with 55% till 2014:
At the same time, in Q2 2016, the Russian oil export reached its multi-year record, amounting to 66 million tons.
This is due to the fact that the decline in the share of oil in the Russia's exports is primarily a consequence of the falling oil prices, rather than the structural transformation of Russia's exports. Therefore, the ruble remains the commodity currency, which greatly depends on price developments in commodity markets.
I believe in 2017 Brent oil will cost $55 - $60 on average. Based on the correlation between the oil price and the ruble price that means the price of the USD/RUB currency pair will be in the range of 60 - 56 RUB:
The ruble 80% decline, which happened at the end of 2014 due to the falling oil prices, could be less significant without simultaneous accelerated capital outflow from Russia, resulting from the financial sanctions against Russia after the annexation of Crimea.
According to the Central Bank of Russia, in 2014, the capital exports by the private sector of Russia totaled a record $152 billion:
But, starting from 2014, the foreign currency loan repayments significantly declined. Moreover, despite the continuing financial sanctions, the capital export from Russia over 11 months of 2016 was 7 times lower than over the same period in 2014. And now most analysts tend to forecast that capital outflow from Russia in 2017 will remain at the level of 2016 and will not create significant pressure on the ruble.
The tight monetary policy of the Central Bank of Russia
One of the key factors of the ruble's strengthening in 2016 was the tough monetary policy of the Central Bank of Russia. To date, the real rate of Russia's economy is more than 4%, which is one of the highest indicators among the countries with developing economies. As a result, the demand for money is low, that is why business and personal loans are in stagnation.
On the one hand, the Central Bank's actions result in the slow recovery of the economy and hold back the GDP growth. On the other hand, in the long term, it will result in consistently low inflation and lowered volatility of the ruble.
In 2016, the Money Supply M2 in Russia increased by 12%, which is less than half the average for the last 15 years. At the same time, the Central Bank of Russia plans to achieve 4% inflation by the end of 2017, which implies the conservation of high real rate. This will restrain the growth rate of the loan services, not allowing the money supply to grow rapidly. This, in turn, will have a stabilizing effect on the ruble exchange rate.
In the context of the inflation forecast, it is also worth noting that the dynamics of the budget deficit of Russia looks much better than the one of other BRICS members, which also indicates the absence of the inflationary threat to the economy.
Putting it all together
It seems that the key threats to the stability of the ruble, such as capital outflows and higher inflation, will not be severe in the current year. In the best case scenario for the oil market, the USD/RUB currency pair will potentially be traded at the average level of 58 RUB throughout the year.
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