Russia is seeing the flip side of a flexible currency fewer and less appealing.
A free-floating ruble, its antidote to the crash in oil prices, is now working against an economy mired in the second year of recession. As crude risen by more than a third in March and April, sending the Russian currency up more than 16 percentage against the dollar, gross national product resumed a deterioration after zero growth in February, according to estimates by the Economy Ministry. It did no better in May, when output shrunk another 0.8 percent.
The system that attained possible the economys adaptation to low oil prices is so far not making growth, said Karen Vartapetov, an analyst at S& P Global Ratings in Moscow.
No longer acting as a shock absorber, the ruble is getting in the way of a pickup in growth that the government expects to resume next year. The decision to allow the currency to trade freely ahead of schedule in late 2014 was among the emergency steps taken to pull the economy from the brink as oils collapse added to a bruising standoff with the West over Ukraine. It has helped protect budget revenue and reserves, sped up adjustments in trade and thrown a lifeline to fighting domestic producers.
Even as the rubles rebound has lagged a rally in commodity markets, it has still gained more than 14 percentage against the dollar this year since touching a record low in January, making it the fourth-best performer globally. That followed losses of 20 percentage in 2015 and 44 percentage the previous year.
Deprived of the currency advantage, local companies also have to contend with moribund consumer demand. Russias finance minister said last month that the country isnt interested in a stronger exchange rate and a fiscal mechanism thats under discussion would insulate the economy from the ups and downs in crude.
As a resurgent ruble cuts into export proceeds and makes foreign goods more competitive in Russia, its also denting corporate profits, which are down a combined 8. 2 percent from a year earlier in January-April after a 53 percent upsurge last year. Giving to companies has declined in every one of the past four months, central bank data show.
Almost all the value-added components of GDP degenerated in May, according to country growth lender Vnesheconombank, which estimates that the pace of contraction worsened to 0.4 percentage on a seasonally adjusted basis. Despite the improving outlook abroad and rising exportations, output have continued shrink, said Andrei Klepach, chief economist at Vnesheconombank.
Statistical data present no turning point in the economic dynamics, said Klepach, who previously served as the governments top forecaster at the Economy Ministry. The rubles strengthening in the spring months is starting to impair financial results of companies.
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