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The hidden advantage of the ruble

05 October 2020

Ershov Mikhail V. Principal Director on Financial Studies, Head of the Financial Analysis Department

The newspaper "Vedomosti" published an article by Mikhail Ershov, the FIEF Principal Director on Financial Studies on the problem of the ruble exchange rate.

Decrease in demand today is the main problem of business, according to the RUIE polls. It’s obviously, that low demand slows down economic growth. Low inflation does not help either - it does not increase demand and does not stimulate economic activity.

Indeed, inflation hit lows back in 2017 and has been at a record low for a long time. However, it is not only the dynamics of prices, which is actually shown by inflation, is important, but also their absolute level. And it is quite high - so much that it constrains the growth of consumption. All this suggests that inflation does not provide an answer to all questions related to prices - there are no less, and perhaps more important aspects. At the same time, low inflation is not always a guarantee of sustainable growth, as we see in the examples of both Russia and other countries with minimal inflation and minimal economic growth.

Interest rates naturally play an important role in ensuring economic growth. They finally began to decline. But this still does little to help the economy. Banks do not particularly cut rates for the non-financial sector, and therefore the rate for the final recipients is still high - it exceeds the efficiency of many projects. With the pandemic and heightened uncertainty, new factors have emerged that outweigh the positive impact of the rate cut. Their reduction was in high demand a year or two ago, then it was much more timely and effective. Now, although it is needed, but it is somewhat belated. Figuratively speaking, if a patient is treated for a long time with hot tea instead of penicillin, then it is very likely that when the injections finally begin to be given, the body will no longer react as it should, because they should have been done earlier. And the problem has become more complicated in general.

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