The rouble rate: to fly up or to land?

The rouble rate: to fly up or to land?
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Konstantin Ordov, Professor of the Russian University of Economics named after G. Plekhanov

Famous Russian writer Maxim Gorky was absolutely right saying, “The one born to crawl cannot fly!” meaning, “If God had meant us to fly he'd have given us wings”. The task of the Ministry of Finance is to make both ends meet, but is it right to think only about the current day? 

Somebody may object and say that the finance ministry is thinking of the future and worries about Russian people’s fate, but they will be mistaken. The Ministry of Finance worries only about the sphere of its direct responsibilities, with respect to balancing the budget’s incomes and expenses, and in this there is more passion than in Shakespeare’s Othello…

In its enthusiasm about looking after the budget the ministry has become unscrupulous and tries to catch the initiative of the exchange rate regime. As such, it may cancel the CB’s "scorched-earth" policy, having sacrificed a significant percentage of economic growth, jobs and crisis overcoming for an inflation decrease.

We have never seen such a long recession in the history of Russia and all of this sacrifice may turn out to be in vain. The state institution is trying to blur the responsibility for the currency steadiness assigned to the Bank of Russia.

It is very easy to find irresponsible solutions with the following logic: we do not need less than 60 roub. for  $1, but if we do not want to spend the Reserve Fund we’ll have 65 roub. for за $1, and if nobody objects at 75 roubles for $1and higher we’ll be able to run a balanced budget.

Does everybody remember “The Song of the Falcon” and the experiments of one of the characters, the Grass Snake? On falling from a rock he laughed and said, “Well, here’s the beauty of flying in the sky! It is in falling down!”

Well, in fact, the Ministry of Finance sees its participation only in falling.

Does everybody understand what it will result in? Decline in the living standard, expensive credits and mortgages (the CB will not dare to decrease the rates soon), and inflation (the import volume grew faster than the export one, and we shall feel this in our pockets), the growth of which will kill the last hope of Russian producers for equal conditions with foreign competitors.

Are there any alternative variants? Alas, it does not seem like it. One should not fall into a fantasy whereby the strengthening of the rouble is due to the representatives of the government economic bloc. It is not. The share of profiteering of the foreign participants of the exchange market has grown more than two-fold. Additionally, the majority of these people are ready to leave Russia as soon as we cease giving them the opportunity to earn at least 50% (which is comparable with the profitability of the currency according to the RTS Index in 2016).

I would not like to believe that the Ministry of Finance may serve as a detonator of the following stage of the economic crisis, but it cannot be not ruled out. In case the scenario turns out to be far from the ministry’s anticipations, 80 roubles for $1 will not be the limit.

The game is over. A balanced and careful policy of the Ministry of Finance, the Central Bank and the Ministry of Economic Development is needed. The reserves are running out, and so is Russian citizens’ money.

We have no more opportunity to crawl. Let us fly up together.