The Ruble No Longer "Plays Games" with the Budget and Foreign Trade

The well-known popular thesis about the ruble exchange rate no longer works — and that's a fact. As many analysts used to say: if the budget deficit grows and the positive balance of foreign trade shrinks, the ruble goes down. Nothing of the sort has been observed this year. Russia's national currency gained up to 40% against a basket of foreign currencies since January.

At the same time, the budget deficit grew. I want to emphasize: its absolute size (2.6% of GDP) is not a cause for concern. This is less than in most countries with economies comparable to Russia's.

In foreign trade: by September 1, the surplus in goods and services stood at $5.9 billion — nearly half of what it was, for example, in the last two months of last year. But back then, the US dollar was trading around 100 rubles, while now it tends toward 80 rubles.

What's the reason? Exporters have stopped keeping large sums of money abroad and are selling more foreign currency. Previously, these funds were needed to transfer to importers to pay for goods. However, the need for such a scheme is now disappearing.

The lion's share of payments for imports is now in rubles. In addition, foreign trade increasingly relies on blockchain-based financial solutions.

But that's not all. Let's look at the M2 money supply. The ruble money supply in Russia is equivalent to 57% of GDP — four times less than in China. And even there, in China, one of the key sectors of the economy — real estate — is stagnating. There is inadequately little money in the Russian economy relative to the goods and services produced. Hence the strong ruble.

But even that's not the main point. If you analyze the velocity of circulation of rubles in various denominations in commodity turnover, it has declined. Despite a formally high level of short-term deposits in the liabilities of the Russian banking system, in reality, money from final consumer demand settles in accounts for a long time, given the extension of deposits.

All of this speaks to fundamental factors that prevent the ruble from falling. Of course, there are also the Central Bank's foreign currency sales under the budget rule, the dynamics of foreign currency purchases by individuals and organizations, and foreign investor demand for ruble assets — all of which also affect the ruble's value. However, these factors did not play a key role this time.

So, the decline in foreign trade and budget revenues should have, according to many analysts, "undermined" the ruble. But this hasn't happened. And in fact, it's a mistake to think that a weak ruble is absolutely beneficial for the budget.

Every step of the ruble's weakening drags inflation along with it and requires additional indexation of social payments. In addition, a weak ruble is a blow to technology imports. So the benefits of an expensive dollar and yuan are fewer than the problems they create.

At the same time, a strong ruble is not a panacea. People often say: the Central Bank's high key rate has a negative impact on business activity. But that's not the point. Even when borrowing is expensive, if the economy becomes saturated with such loans, the gears of business activity continue to turn. Moreover, a high key rate forces investors to choose business projects more carefully and, when implementing them, to place greater emphasis on attracting the best professionals. Expensive money generally improves the quality of business activity, enhances competition, and ultimately has a beneficial effect on the market.

However, we now see that the approval rate for bank loan applications in the economy has fallen sharply compared to last year and has not yet recovered. The Russian stock market has not yet fully unlocked its potential to provide businesses with the necessary liquidity. Together with inadequately low M2, this does not create clear incentives for expanding business activity.

At the same time, the dynamics of the US dollar exchange rate and the Central Bank's key rate can easily be linked to changes in capital inflows and outflows in the OFZ bond and gold markets. That is, with deep modeling of the situation, there are no surprises for investors in changes to the key rate and the ruble's value.

What's next? Russia's economic development is moving toward transforming the country into an exporter of more capital, services, and high-margin goods. The increasing use of the ruble in foreign trade will inevitably lead to further growth in demand for it.

A strong national currency allows for increased investment abroad and the relocation of individual value chains there, which addresses the issue of labor shortages in the domestic market. Business operations abroad and earnings there — that's the source of large budget revenues that will outweigh any benefits of a weak ruble.

And of course, a strong national currency is a powerful factor in growing domestic consumer demand, and therefore VAT revenues. So far, even with a base rate of 20%, these receipts net of inflation have stopped growing, and in some months of this year they went negative. Raising the rate to 22% could work in favor of collections — but only if domestic demand begins to increase in real terms, and for that to happen, the national currency must not weaken.

In the export sector, producers of high-margin goods — automobiles, machinery, equipment, etc. — need to find more niches in the global market. That is where the solution to overall sales volumes lies.

Effective import substitution involves a combination of domestic producers' capabilities and what is more profitable to purchase abroad. This holds true everywhere, except for the production and maintenance of critically important domestic infrastructure elements: here the emphasis is on maximum localization.

At the same time, countries now need to be prepared to respond to an impending global economic crisis. At its root are AI structures — increasingly autonomous from humans — that are gaining influence in finance. In such a situation, a stable ruble could become a bright beacon for investors in the increasingly turbulent waters of the global financial ocean.