Boris Kheifets: Economic decisions made at an intuitive level

The ruble has significantly strengthened against the dollar and the euro over the past six months; this trend has not gone unnoticed by economists, who come up with varying assessments of both the process and its consequences for the Russian economy. Invest Foresight asked Boris Kheifets, Professor at the Russian Government’s Financial University, to explain whether today’s exchange rates reflect the real situation, whether the strategy to expand the use of national currencies in trade is correct and whether it is possible (and advisable) to ‘de-dollarize’ the Russian economy.

The current exchange rates of the dollar and the euro are quite low compared to the beginning of the year. How much do you think they reflect the real situation?

– On the one hand, the ruble has remained strong for quite a while, for obvious reasons. Russia found itself in isolation, fighting a very tough and unprecedented sanctions war. That brought imports down by 40-50%; exports are also down, but foreign currency continues to flow in.

In my last report, I called this a “financial isolation syndrome.” In fact, it is a variant of the paradox termed Dutch disease. The Netherlands once got a large influx of foreign cash due to massive resource exports, which caused the value of its national currency to rise sharply.

Frankly, it is quite bad for the economy because goods produced in the country lose their competitive advantages and there is little motivation to export them.

It may seem that the effect for the ruble and its exchange rate is similar but we have two additional factors in place. The lesser factor is shrinking imports of foreign currencies. But the main problem is that we have restricted the use these foreign currencies, including purchasing by individuals and storing by companies. This is essentially de-dollarization.

This is not exactly normal and does not reflect the actual situation. As you remember, in Russia’s modern history we have already seen an official exchange rate and a black market exchange rate. Nothing good came out of that.

Clearly, our local producers benefit from the strong ruble while exporters benefit from the weak ruble. Who is right in this confrontation between the Finance Ministry and the Central Bank?

– Currently, it is hard to use terms like “right” and “wrong.” Many decisions these days are simply intuitive, in my opinion.

But overall, the Central Bank has a high authority. Many experts approve of this megaregulator’s policy. The policy is smart and aligned with the current conditions.  

Yet, we probably should adopt a number of new laws. To remind, one of the issues has been that the Central Bank cannot buy and sell currency to have a regulating effect on the exchange rate.

It should be noted that enterprises need currency, among others, to have an opportunity for modernization; for citizens, an opportunity to have foreign currency savings – if only under the pillow – was an option to protect themselves against inflation and maintain the purchasing power of their money.

What should be the optimal US dollar/euro to ruble exchange rate today and why?

– Many believe that 75 rubles per dollar would be an adequate exchange rate. Yet, at all times the most optimal rate is always the market one rather than the one that the government deems convenient. In the current circumstances, the nominal 75 rubles per dollar is considered “optimal” as this is the exchange rate which was observed in early February, with the corresponding prices complying with this rate. Obviously, there were certain expectations, and of course we still can calculate the exchange rate based on the ratio of consumer basket costs now and then.

Also, consumer basket goods prices in dollars have increased as well due to global inflation considerably accelerating since early 2022.

To sum it up, there are different methods but no better option exists than the market-based method of determining the exchange rate.

Russia is seeking to expand its trade in national currencies. Is this a proper strategy?

– Indeed, we are becoming increasingly supportive of the use of national currencies in international payments for delivered goods or resources. However, in this situation, the main question still remains unresolved as to what rate should be used to convert, say, the ruble to yuan.

The yuan will be pegged to the dollar, and we will eventually have to peg the ruble to a freely convertible currency while calculating the rate.

Obviously, we will peg currencies to stock exchange rates, such as Shanghai Stock Exchange rates.

Is full de-dollarization of the economy possible today? Is it necessary? 

– Actually, it would be politically correct to claim that de-dollarization is required. With many exchange rates existing and current restrictions in place, we cannot use the ruble to the full extent for efficient economic relations.

Once again, if we increase the amount of settlements with other countries in national currencies, we will still be lacking a free trade platform or exchange to determine the actual exchange rate of, say, the ruble to yuan. We still need a third, freely convertible currency.

I definitely believe that de-dollarization is necessary. We need to get rid of foreign currencies – but this requires efforts to strengthen the economy as the economic decline makes the task of displacing the dollar unachievable.

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