Analysis: Russian drought to put a brake on rouble’s rise

By Andrey Ostroukh

MOSCOW (BestGrowthStock) – Russia’s severe drought and stumbling oil prices look set to cap the rouble’s appreciation this year as they put pressure on the country’s revenues and current account surplus.

When the drought began in late June, banks including Goldman Sachs, Raiffeisen and BNP Paribas saw it as positive for the rouble, expecting the central bank would battle an expected rise in food inflation by allowing greater currency appreciation.

But as a prolonged drought has devastated many Russian grain-growing regions, slashing its grain crop by nearly a third, Russia is having to import more than previously thought, putting pressure on the country’s current account surplus.

Along with a faltering global economic recovery, which is depressing oil prices and risk appetite, that is prompting analysts to trim their rouble forecasts, arguing that supporting the economy will take precedence over combating inflation risk.

Russia’s economy grew 2.5 percent year-on-year in July — half as fast as in June — and concern about the outlook and reduced demand for riskier, emerging market assets have pushed the rouble to a seven-week low this week at 30.95 to the dollar.

Russia’s Economy Ministry, in economic forecasts for 2011-2013 released on Thursday, has downgraded its exchange rate forecasts for the next three years.

It no longer expects the currency — which has rallied 20 percent against its basket since the start of 2009 — to gradually appreciate, forecasting the currency will average 30.5 to the dollar next year and close to that in 2012 and 31.0 to the dollar in 2013.

Gazprombank has revised its forecast for the rouble for the end of this year to 34.27 against the basket, from a forecast in July of 33.57, and only 0.5 percent higher than current levels.

“The downside pressure on the rouble will likely have two sources. The first is a presumed weakness of oil prices, the other is a reduction of the current account surplus from rising imports,” said Anna Bogdyukevich, analyst at Gazpromban.

ING has cut its year-end forecast to 33.05 roubles per basket from 31.93 a month ago.

Deputy Economy Minister Andrei Klepach said this week that the drought would cut economic growth this year by up to 0.8 percentage points and push inflation up above the 6-7 percent target.

The rouble, he said, should be largely unaffected as Russia will retain its trade surplus and reserves. Financial markets, however, are not convinced.

“If inflation accelerates it points at pressure on the rouble through higher imports and pressure on the trade balance,” said Natalia Orlova, chief economist at Alfa Bank.

Rising imports, she says, could slash the fourth-quarter current account surplus to below $10 billion from $33.3 billion in the first quarter of 2010.

“Only a few are betting on a stronger rouble now as there is no confidence in fundamental reasons,” Orlova said, forecasting the rouble will end 2010 at 34.20 versus its basket.

Signs that global economic recovery is slowing have sent oil prices down $10 from a peak of nearly $83 on August 4, threatening to hurt revenues in Russia, the world’s biggest oil producer which relies on the oil and gas industry for more than half of its budget income.

Russia’s imports from countries outside the former Soviet Union surged 35.6 percent in July from a year earlier and analysts expect the trend to continue. Andrei Sizov Sr., CEO of SovEcon agricultural analysts, said on Thursday that Russia, usually the world’s No. 3 wheat exporter, may need to import up to 6 million tonnes of grain in 2010/11 because of the drought.


Investor sentiment already seems to be cooling on Russia, which had been favored as it offers yields above 6 percent on some assets. Data from Emerging Portfolio Fund Research shows Russia saw its biggest weekly fund outflow since May in the week to August 20, extending outflows in previous weeks.

“Foreign investors’ attitude toward Russia is becoming worse given a deterioration in the economic outlook. Undoubtedly, the drought factor took its toll,” said a dealer at a major Russian bank in Moscow.

The government forecasts 4 percent economic growth this year, reversing a 7.9 percent slump last year, but Klepach warned growth could be only 3.6-3.8 percent due to the drought.

The rouble has weakened to seven-week lows of 34.65 against its basket — moving out of the central bank’s intervention range of 34.40-33.40 per basket.

That means the central bank is not standing in the way of the rouble. So if it wanted to battle inflation with a stronger currency it would have to stage artificial appreciation by actually buying roubles — something it is unlikely to do at a time when economic growth is slowing.

Any such steps would also contradict its intervention policy and its aim of gradually moving toward a free-float regime.

Raising interest rates from current record lows is also seen as unlikely.

“The rouble doesn’t appreciate by itself, and to make it stronger the central bank would have to sell its reserves or hike interest rates, which is absolutely inappropriate for the post-crisis economy,” said Vladimir Osakovsky, economist at Unicredit bank in Moscow. (Editing by Susan Fenton)

Analysis: Russian drought to put a brake on rouble’s rise