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The dollar peak is yet to come

When the ruble was worth 120, many analysts said that it should strengthen because the country has a strong balance of payments (investment flows are frozen, and there is a surplus in foreign trade). But the ruble has already strengthened from 120 to 83, and yet the balance continues to be in surplus. Continuing this logic, is it really worth waiting for strengthening again and again?


Practice shows that the balance of payments can explain short-term deviations of the currency from a fundamentally justified level, but do not change it. For example, Iran, as an export-oriented economy, saw a sharp increase in the balance of payments surplus in 2018 after the introduction of new sanctions. But the rial did not strengthen, but depreciated several times.


I believe that the ratio of currencies should reflect the ratio of the volume of production in the country and the printed money supply. If we talk about the money supply, then the exchange rate of the ruble is inversely proportional to the speed of printing, and if the exchange rate did not depend on the money supply, it would be possible to print an infinite number of rubles, exchange them for dollars and buy all the companies in the world. Of course, this is not how the economy works, so the exchange rate will depreciate if the money supply grows, other things being equal.


The second component is production, it is reasonable to measure it as GDP in one currency. Since the dollar still dominates world trade, it is reasonable to compare the GDP of the two countries in dollars (this gives an idea of ​​​​how the volume of production in these countries correlates with each other).


If we compare the exchange rate of the ruble with the value of shares, then:
– GDP is like a company’s revenue
– Money supply is like the number of shares of a company


The higher the revenue, the higher the price, other things being equal. The more shares printed, the lower the share price (which is why VTB costs a few kopecks per share, and Sberbank 160 rubles).


In addition to these basic variables, there is also such a parameter as currency negotiability. You can buy goods and services for dollars in almost any country in the world, but it is problematic to pay for rubles or other currencies abroad. Therefore, the exchange rate of the ruble against the dollar should also take into account this difference in how much easier it is to sell dollars in the world than rubles (one might say, the demand for dollar liquidity).


In the current conditions, the economy is under severe stress – Western investments are disappearing, exports and imports are declining, and the incomes of companies and people directly connected with these industries, as well as serving these industries, are falling.


It is unlikely that this will lead to an increase in Russia’s GDP in dollars, that is, based on the ratios of production, the exchange rate should weaken.


As for the money supply, we have examples of the crises of 2008, 2015, 2020, and the behavior of the Central Bank was approximately the same – the printing of money accelerated (not directly, but of course through banks). The money supply increased by an average of 16% per year.


The turnover of the ruble has been hit by sanctions and the refusal of Western companies to cooperate with Russian companies. Therefore, here, too, the ruble should weaken.


If we add the effects of these three factors, then the ruble against the dollar is highly likely to be above 110 in the coming year. A more accurate assessment depends primarily on the scale of the decline in GDP. If we take the scenario of 1998, when GDP in dollars fell by 38%, then according to my calculations, the dollar/ruble exchange rate could rise to the level of 165.


The main variable is how much the Russian economy will fall, that is, the fall in the Russian GDP in dollar terms. This is subject to refinement of assessments as new introductory and future discussions come in.

About author

Oxford graduate with honors. He worked in large financial projects for well-known Wall Street corporations. After he earned his first capital and a reputation as a successful trader, he opened his own company. At the moment, the growth of the company's capital is 20% per year.
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