The key facts

  • The inflation gap between Russia and the US corresponds to a weakening of the ruble of about 1.5–2% per year, but only over a horizon of 3–5 years.
  • In the short term, what matters more is the level of interest rates, the export-import balance, fiscal policy, capital flows and geopolitics.
  • Growth in foreign purchases, a fall in export revenues or capital outflows could accelerate the ruble's weakening beyond the inflation model.

The inflation gap works only over the long run

Higher inflation in Russia compared with the United States may create prerequisites for a long-term weakening of the ruble, but it does not determine the exchange rate over the coming year. This assessment was shared with Gazeta.Ru by a stock market expert at BCS World of Investments Andrey Smirnov.

Estimating the effect: 1.5–2% per year

According to Smirnov's calculations, with the current inflation ratio and all other conditions unchanged, this factor would correspond to a weakening of the ruble of roughly 1.5–2% per year. However, the analyst stressed, such a model is more applicable over a long horizon — from 3 to 5 years. Over shorter periods, what matters more is the level of interest rates, the ratio of exports to imports, fiscal policy, capital flows and geopolitics. In addition, he said, one must take into account the restrictions and low liquidity of the Russian currency market.

What could support the ruble — and what would weaken it

High real interest rates, Smirnov explained, can support the ruble by keeping interest in ruble savings alive, while expensive exports and restrained imports can offset the impact of the inflation gap. The opposite effect arises when foreign purchases increase, export revenues decline or capital flows out: under such conditions the ruble may weaken faster than a calculation based on price growth would suggest.

Context

The publication follows an earlier Gazeta.Ru article in which a condition for the ruble's weakening was named. The practical takeaway of the commentary for the reader is that the popular rule 'the inflation gap equals the currency's weakening' is not suitable for short-term exchange rate forecasts: over a horizon of up to a year it is outweighed by interest rates, the trade balance and capital flows, while the inflation model itself only works on a scale of several years.