Free-floating rouble is a positive for Russia, say analysts

Former US President Harry Truman famously complained about economists who offer “on the one hand, on the other hand” solutions. When asked about Russia’s free float, they are all one-handed.

The central bank’s policy of allowing the market to set the exchange rate, in place since late 2014, is a long-term positive for Russia, according to all 18 analysts surveyed by Bloomberg. The onus is on the government to respond to President Vladimir Putin’s frustration with rouble strength at a time of oil volatility, with most economists saying it needs to cut spending and expand the list of state-owned companies being sold.

“It is always better to have a free float,” said Ilya Golubov, head of research at Evrofinance Mosnarbank in Moscow. “The economy faster adapts to a new reality.”

The exchange rate was thrown into the spotlight at the end of last month. Putin called the free float into question by asking the prime minister to monitor the rouble’s movement as it traded out of step with oil. The central bank was forced to repeat it’s committed to the policy after a Kremlin adviser followed the president by warning the currency’s strength relative to oil endangered the budget and the competitiveness of local companies.

The rouble’s 3.1 per cent drop in July hasn’t kept up with the decline in Brent, which plunged more than 14 per cent the same month. Such a mismatch hurts the budget because the government receives fewer roubles per barrel of oil sold for dollars abroad. The Russian currency strengthened for a fifth day, trading 1.5 per cent stronger at 64.5775 against the greenback on Monday.

Brent crude, which is used to price Russia’s main export blend Urals, was at 2,929 in rouble terms on Monday. That’s more than 7 per cent below the 3,165 average Urals price used for this year’s budget.