Economists warn of the risk of "Dutch disease" due to the exchange rate of the ruble

Strengthening the ruble and high oil pricestemporarily curb inflation, but the dominance of the oil and gas sector with a strong ruble is fraught with "Dutch disease" and price acceleration in the future,experts say

The influx of EXPORT earnings from the sale of hydrocarbons at high prices and the strengthening of the ruble, including due to internal foreign exchange restrictions, carry the risks of the "Dutch disease" of the economy, when a high exchange rate leads to a backlog of high-tech industries and an increase in the cost of goods in the long term. This opinion was expressed by DOCTOR of Economic Sciences, Professor of the Russian University of Economics. Plekhanov Denis Domaschenko at the round table "External Challenges for the Russian Economy", held at the Institute of Economics of the Russian Academy of Sciences.

Given the shortage of critical imports, a strong ruble may motivate market participants to look for alternative supply channels, other experts say.

According to the Ministry of Economic Development, "now the strengthening of the ruble is at peak levels." “Imports, capital flows will adapt to new conditions. An important role in these processes should be played by the further reduction of the key rate by the Bank of RUSSIA,” RBC was told in the press service of the department.

On May 23, the Ministry of Finance announced that the rate of mandatory sale of foreign exchange earnings by exporters was reduced from 80% (it had been at this level since the end of February) to 50%. This should reduce the amount of currency that is directed to the purchase of the ruble, and, accordingly, restrain the strengthening of the national currency. RBC sent a request to the Central Bank.

What is "Dutch disease"?

The “Dutch disease”, or the Groningen effect, is understood as a sharp strengthening of the national currency due to the rapid growth of exports of goods from one dominant industry. Most often, hydrocarbon raw materials are meant. The “Dutch disease” leads to the fact that at first the influx of foreign currency reduces inflation in the country, but at the same time it slows down the development of other industries and hinders economic growth, which is fraught with a price surge in the future.

The concept appeared in a 1977 Economist article describing the consequences of the development of a large gas field in the Dutch province of Groningen in the early 1950s. The sharp increase in gas exports increased the level of income of the population due to the strengthening of the Dutch guilder, and the demand for imported goods increased. As a result, the national industry sank heavily due to the inability to compete with foreign manufacturers and lack of funding (investments poured into exploration). The unemployment rate in the country increased, the economic potential decreased, the national currency weakened. Now the Netherlands itself buys fuel, although in the 1990s it was one of the largest gas exporters in Europe.

The danger of a strong ruble

Since April, after the introduction of currency restrictions by the Bank of Russia and due to the excess of exports over reduced imports, the exchange rate of the ruble, which sank to a record high after Western sanctions, has been intensively strengthening against the DOLLAR and the euro. After reaching the bottom point in March at 126 rubles. per dollar and 135 rubles. for the euro, the ruble fully won back the fall, reaching on May 20 the minimum level for four years - 58 rubles. per dollar. Following the growth of the ruble, inflation began to decline in Russia. According to the latest data from Rosstat, prices increased by 0.05% in the week from May 7 to 13, which is 44 times less than in the first week of the sanctions.

The strengthening of the ruble is also facilitated by the influx of oil and gas revenues in foreign currency. Oil prices, Russia's key export commodity, continue to be high. The Russian brand Urals is trading in the range of $70-80 per barrel, which is a high level, even despite a discount of 30% compared to the international benchmark Brent.

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However, the disinflationary effect of the strengthening of the ruble will not last long, Denis Domashchenko is sure. According to him, due to the strong national currency, the Russian economy is becoming less competitive in the world. This happens because the goods produced by various industries (except for oil and gas) become very expensive for those countries that are ready to buy them in Russia. First of all, this applies to high-tech sectors, including weapons, he explained to RBC.

To help maintain a balance between curbing inflation within the country and economic growth could be a fixed ruble exchange rate instead of a floating one (in force in Russia since the end of 2014), the expert argues. Manual containment of the yuan exchange rate helped to get rid of the “Dutch disease” for CHINA, which managed to compete with American technology giants and lure part of the production to itself (with a high dollar exchange rate against the yuan, labor, real estate, housing and communal services in China were cheaper), cites the example of Domaschenko. In addition, a managed exchange rate will “cure” the ruble from volatility, which now scares investors, he added.

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Other diagnoses

The fact that the Russian economy has signs of the "Dutch disease" - the strengthening of the ruble and the weakening of competitiveness, agrees chief researcher at the Institute of Economics of the Russian Academy of Sciences, professor at the Financial University under the government Boris Kheyfets. However, he still puts another "diagnosis" on the economy - financial isolation syndrome. “On the one hand, the inflow of export currency remains, but on the other hand, the main problem is isolation from the world market, reduction in imports, payments, investments,” he said.

The main risk for the economy is associated with a reduction in imports, which are critically necessary for the functioning of the domestic industry, says Daria Ushkalova, HEAD of the Center for Research on International Macroeconomics and Foreign Economic Relations of the Institute of Economics of the Russian Academy of Sciences. “Changing logistics, finding new suppliers, facilitating customs procedures, as well as financial, legal and diplomatic support for importers - all this will be impossible with a low ruble exchange rate,” she replies Domashchenko. In her opinion, it is the short-term strengthening of the ruble that can create motivation for importers to look for alternative sources of certain goods.

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In addition to energy, high world prices are observed for a wide range of commodities exported from Russia, said Gleb Pokatovich, First Vice President of the Center for Strategic Research, in a commentary for RBC.

“In particular, record levels in recent months have been achieved in quotations of mineral fertilizers, non-ferrous and ferrous metals, grain and other agricultural products,” he specified. According to Pokatovich, against the backdrop of geopolitical pressures and logistical constraints, it is now impossible to single out one dominant export-oriented industry that is the beneficiary of high prices in world markets, as it would be in the case of the classic “Dutch disease”.

As the Ministry of Economic Development expects, by the end of 2022, imports to Russia will decrease by 27% compared to 2021 in physical terms due to logistics and contraction of domestic demand, and in value terms - by 17% (from $304 billion to $251.9 billion ) taking into account global inflation and an increase in transport and logistics margins. “We understand that new channels for importing goods will cost us more,” the department noted.