The key facts

  • An increase in the budget deficit may put pressure on the ruble, but does not mean its inevitable weakening.
  • The outcome depends on the direction of spending: investments in infrastructure and equipment can, over time, increase production and exports.
  • The way the deficit is financed — borrowing, reserves and other sources — affects the money market and the supply of currency in different ways.

Deficit and exchange rate: what the expert said

An increase in the budget deficit may put additional pressure on the ruble, but this does not mean its weakening is inevitable. This was told to Gazeta.Ru by investment strategist at Garda Capital Alexander Bakhtin. According to him, two factors are key: what the additional spending is directed at and how the shortfall in revenue is covered.

Direction of spending and source of financing

Additional government spending, Bakhtin explained, increases demand for goods, including imported ones. Foreign purchases require currency, and expanding domestic demand may intensify inflationary pressure. At the same time, the outcome depends on the structure of spending: investments in infrastructure and equipment can, over time, increase production and export capacity.

Why an identical deficit does not mean an identical exchange rate movement

The source of covering the deficit also matters: borrowing, the use of reserves and other methods affect the money market and the supply of currency in different ways, Bakhtin noted. Therefore, the same size of the budget gap does not mean the same movement of the exchange rate. The Gazeta.Ru article comes in the wake of an earlier publication by the same outlet, in which Russians were explained when a strong ruble will be reflected in prices; no connection between these publications and Uzbekistan is given in the sources.