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  • Evaluation of Devaluation of Ruble: Winners and Losers

    14.06.2017 | Comments | Economy | 227 Zhengizkhan Zhanaltay

    The 2015 year was a difficult year for Russia due to the economic slowdown in the economy and sharp depreciation of ruble against the dollar. The ruble has fallen from 39 on 26 September 2014 to 69.4 on 30 January 2015 losing more than half of its value where it continued to fluctuate and fall to 78.6 on 12 February 2016. Since then ruble started to gradually appreciate and reach to 56.6 on May 29 gradually, 2017 (, 2017). During the first couple of months, experts on the issue were discussing the possibility of an increase in the export level and comparative advantage of Russia’s manufactured products (Hille, 2015). After 1.5 years since the devaluation of the ruble, it has been observed that depreciation of ruble against the dollar had effected various sectors differently (World Bank, 2017). For instance, growth in labor-intensive industries that requires less import has flourished during the last two year such as agriculture, textile and wood industry whereas companies in automobile and electronics continuously diminished their growth level.

    Moreover, a number of sectors have received an additional boost from other circumstances like international embargo applied to Russian products that offered an invaluable opportunity for domestic firms in these sectors. Russia’s retaliation in the form of food ban of the most products from the European Union (EU) countries was viewed as a smart move to show a political strength with an economic outcome (Hille, 2015). Currently, the embargo for imported goods is working as a shield blocking many EU goods to take their places in Russian stores while depreciation of ruble significantly increased other imported products prices, which diverts customer's preferences to buy local products mainly due to economic reasons. As a result, the weak ruble has created a favorable condition for import substitution (Investopedia, 2017).

    Among sectors, the agricultural sector largely benefits from import substitution situation and manages to grow 1.5% in the first six months in 2016 and 0.7% in the first quarter of the 2017 (World Bank, 2017). For instance, Russia has become the largest grain exporter in the world in 2016 with 34 million tones, and its total grain production reached to a record volume of 119 million tones. In addition to grain, Russia increased its production level in other products like cheese, meat and chicken alongside with rise in the greenhouse vegetable production that increased 30% compared with previous year. The positive effects of the import substitution were large enough to spill over to other sectors related to the agriculture like fertilizer industry. Due to increased production level usage of crop chemicals rise 16% in Russia whereas the global growth rate stood at only 2.2% in 2016 (Buckley, 2017).

    Looking at the sectors which were negatively affected by the devaluation of ruble, reduction of sales in automobile sector was quite significant, although the falling trend in sales in the automotive sector started in 2013 in relation with the economic slowdown in Russia. In the following years due to a sharp depreciation of ruble, the costs of the cars during 2014-2016 years has increased 40% causing a 30% decrease in sales in 2015 which reduced to 11% in 2016 compared with a previous year (Ivanov & Tomyshev, 2017).

    A brief analysis of benefitting sectors shows that products like wheat, wood and fertilizers have already a comparative advantage in the global market (Simsek,, 2016). Thus, price advantage due to weak ruble is useful for mostly products that have already a comparative advantage. At first, the positive import substitution trend was not strong enough to increase the general growth rate in the manufacturing sector where it contracted 1.6% in 2016. However, latest figures show that manufacturing sector growth increased to 0.7% in the first quarter of 2017 meaning the positive momentum of import substitution in combination with rising oil prices and improving economic growth has reflected on the growth rate of the sector. (World Bank, 2017).

    On this point, Russian government also focused on attracting international companies to move part of their production process to Russia. For instance, officials from Russian government is meeting with the textile giant Inditex to discuss investment opportunities in the country (Amon, 2017). The main argument of the attraction of foreign investment is based on cheap labor and falling price of production costs in terms of dollar. Due to devaluation, labor wages dropped significantly in terms of dollar and give a significantly boost to the position of Russia as a low wage production country. Currently, labor salaries in Russia have entered in a serious competition with global leaders like China and India in terms of low-wage production. For instance, according to a study conducted by the Bank of America Merrill Lynch, real annual wages in Russia in the first half of 2015 constituted $565.4, whereas this amount is $764.3 in China and $636.6 in Mexico. This significant drop in prices is seen more clearly when compared with the previous year where the real annual wage in Russia decreased by 33% from $839.7 (Epple, 2015). This situation has provided an alternative for companies whose target market is Russia or Eastern European countries and has production facilities in other low-wage production countries like China. Therefore, under current situation it would be beneficial for them to move part of their production facilities to Russia due to low wages and reduced transportation costs.

    However, the advantageous effect of the weak ruble cannot continue for a long time since the value of ruble is closely related to the changes in oil prices. In order to protect the favorable conditions for import substitution ruble needs to stay weak. Recent moves of the Finance Ministry on buying foreign currencies have indicated that Russian government wants ruble to remain low (Kuznetsov & Tanas, 2017).

    On this point, there is a conflict of policy targets between the Central Bank of Russia and the Finance Ministry. The Central Bank is against buying foreign currency since this move slows down the fall of inflation rate and declared that it would not intervene in the currency market in order to reach its 4% inflation rate target at the end of the year. However, in order to increase the export amount and attract more investments to the country Finance Ministry wants to keep the ruble weak and continuous to buy foreign currency since February 2017 (Kuznetsov & Tanas, 2017). In short, it would be appropriate to say that long-term benefits of low inflation rate and short-term benefits of increased exports are in competition with each other.

    In his one of the latest speeches, President Vladimir Putin stated that they would pursue market-based measures, while analysts on the issue stated that the term of market-based measures was quite vague and specifically, which tools would be used to prevent appreciation of ruble without disrupting the fall of inflation rate was uncertain (Arkhipov, 2017). Even after the statement of President Putin ruble depreciated 1% on 25 April 2017. Moreover, Industry Minister Denis Manturov expressed that in order to protect the domestic producers ruble should not fall below the 58 versus US currency. Furthermore, Agriculture Minister Alexander Tkachev has declared that a 60-65 range would be much beneficial for farmers and added that at the current rate agricultural export could decrease $3 billion in 2017 (Arkhipov, 2017).

    In conclusion, depreciation of ruble against dollar has created a price advantage for number of sectors, while the prices in other sectors have significantly increased. Moreover, it seems that the reduced costs of production are improving the investment climate and attracting the attention of many companies to relocate or establish at least part of their manufacturing facilities in Russia. Meanwhile, Central Bank and Finance Ministry clashes with each other to protect their policy objectives where Russian Government seems to be more inclined to support to Finance Ministry in order to increase the amount of investment flow and export volume of the country.

    References (2017). Currency Exchange Indicator.

    Hille, K. (2017). Weak rouble and sanctions breathe life into Russian industry. The Financial Times.

    Investopedia (2017). Import Substitution Industrialization.

    World Bank (2017). From Recession to Recovery. Russia Economic Report no.37. The World Bank.

    Buckley, N. (2017). Russian agriculture sector flourishes amid sanctions. Financial Times.

    Ivanov, A., Tomyshev, A. (2017). Overview of the Russian and CIS Auto Industry.$FILE/ey-russia-automotive-market-overview-2017-eng.pdf

    Simsek, N., Simsek, A., Z.Zhanaltay (2016). Analysis of Bilateral Trade Relations between Turkey and Russia.

    Amon, A. (2017). The Kremlin Encourages Big Fashion Brands to Produce in Russia. The

    Epple, N. (2015). Cheap Labor Won't Lure Investors to Russia. The Moscow

    Kuznetsov, V, Tanas, O. (2017). Russia’s Currency War Flounders with Central Bank on the Fence. The

    Arkhipov, I., Andrianova, A., Kolesnikova, M. (2017). Putin Turns up Heat on Ruble before Central Bank Has Its Say.  

    Note: The views expressed in this blog are the author's own and do not necessarily reflect the Institute's editorial policy.

    Tags: Russia, Ruble Devaluation, Economy


  • Deputy Director

    Zhengizkhan Zhanaltay

    Zhengizkhan Zhanaltay is a research fellow in the Eurasian Research Institute at H.A.Yassawi Kazakh Turkish International University. Zhengizkhan completed his bachelor’s degree at international relations department of KIMEP University in 2010.