The Russian government has suggested that the slide in the value of the ruble may have a silver lining, but will it really help perk up the sluggish economy or just crimp consumption by consumers?
The ruble has been caught up in the sell off of emerging market currencies, losing about 6.5 percent of its value against the US dollar in recent weeks to hit a five-year low of more the 35 to the greenback. It has slid by around 5 percent to a new record low of more than 48 rubles to the euro.
However, Russian Economy Minister Alexei Ulyukayev looked to the bright side of things.
“This will help improve the competitiveness of a range of industries,” he told Moscow’s Prime business news agency.
“I am not a proponent of stimulating the economy through an artificial weakening of the ruble,” Ulyukayev said. “But since what we have now is not an artificial but a natural weakening... then why not enjoy its positive effects?”
The government will feel an immediate boost as most of its budget revenue is from the export of gas and oil, which are sold for US dollars.
The budget deficit was reduced to 0.5 percent of GDP last year thanks to higher oil prices.
However, with growth at just 1.3 percent — a quarter of the Kremlin’s target — there is not enough funds for Russian President Vladimir Putin to fulfill his 2012 election campaign promises.
“All the increases in social benefits will be financed,” the daily Vedomosti said. “Of course with rubles that are worth less, but they will be financed.”
Economist Nikolai Petrov at Moscow’s Higher School of Economics believes the ruble’s slide was intended.
“The government, which is trying to make ends meet and must find 15 billion dollars for Ukraine, went consciously in that direction,” he said.
A weaker ruble will make Russian products cheaper on foreign markets, raising hopes for an export boost. However, economist Chris Weafer at Macro Advisory said that Russia does not produce many machine tools or consumer goods that would benefit most from a weaker ruble.
More likely the benefit would come from product substitution as Russians faced with sharply higher prices for imported goods would turn to more domestic products.
However, a weaker ruble could entice more companies to set up shop in Russia, according to economist Yakov Mirkin in the Russky Reporter magazine.
Having lived through devaluations during the Soviet period and and again in 1998 and 2009, Russians have been watching the sharp slide of the ruble with trepidation.
A sharp drop in the value of the ruble makes foreign travel less accessible for Russians as well as drives up the prices of imported consumer goods, reduces purchasing power and usually fuels inflation, which then leads to higher interest rates.