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What does a weaker ruble mean for Europe?


The ruble has been making headlines for some time now although the dramatic tone has increased significantly this week. Since this year began, the Russian currency depreciated from 32 RUB/USD to 60 RUB/USD, with the exchange rate actually approaching 80 on Tuesday 16 December 2014. The decline over the first part of the year reflected the geopolitical conflicts and the adverse effect which they entail for local economy, as this will fall victim to sanctions and lower investments. However, more recently, the depreciation gathered pace as a result of the fall in oil prices; naturally, the market reaction was aggravated by the continuous tergiversation in the political conflict with Ukraine.

Of note, the Central Bank intervened to support the currency but the extent of the interventions has gradually declined and an exchange rate regime akin to a free floating one has come into effect. The scope of this move was twofold: (i) it prevents an exacerbated decline in the country’s FX reserves and (ii) it allows the currency to act as a rebalancing tool. That is, reflecting the unique circumstances that have taken a toll on the ruble, the authorities reckoned that downscaling the FX reserves to target a certain exchange rate is likely to spur speculations.

On the other hand, the depreciation of the currency serves to support the budget against a backdrop of lower USD oil exports and it increases the cost of imported goods. The latter results in higher inflation but it concurrently decreases the demand and hence, the country’s imports. The data showed that such trends are already observable with imports falling by 12% YoY in October. To put things in perspective, Russia has seen a strong increase in consumption and imports over the last few years as the tight labour market and the sizable rise in wages have spurred demand; indeed, the growth model of the last few years was highly unsustainable and resulted in a diminishing current account surplus (imports grew faster than exports) and persistently high inflation. That is why a depreciation of the ruble, while costly in the short term was called for in this context. It goes without saying though that overshooting is not desirable as imports cannot be fully substituted or halted.

However, having established that authorities will only seek to reverse part of the ruble’s losses and that the Russian imports are due to plunge, the question remains – What are the implications for Europe? The largest imports come from: China, Germany, Ukraine, Belarus, Japan, the US, Italy, France, South Korea and Poland. However, of greater importance is how critical these flows are for the exporting country and from this perspective, the Baltic countries, Finland and Poland stand out as the most prone to a decline in exports (see Chart).

Source: ITC, CC Research Calculations

However, in order to approximate what the implications of the lower exports for the economic growth are, we also have to look at the share of goods and service exports in GDP. Combining the data in the chart above with the one on exports to GDP, we find however that the conclusions do not change much as the countries we mentioned earlier are also highly reliant on exports (see Chart below).

Source: ITC, World Bank, CC Research Calculations

In terms of sectors, the European Commission data shows that the EU exports to Russia are dominated by machinery, transport and equipment, which have a 47% share in total, and chemicals, which contribute another 17% (of which pharmaceuticals are 8%). In light of the ban imposed by Russia we also mention that agricultural products accounted for 10% of the exports to Russia in 2013.

By country, the sensitivity of the sectors varies greatly, with two thirds of Latvia’s beverage exports going for instance to Russia (see Table). Similarly, the data below shows that the Bulgarian, Slovenian, Croatian and the Hungarian pharma exports are highly exposed to Russia as are the machinery exports of several EU countries and the Greek food products. Of note, in the tables below we also include the sector’s share in the country’s exports as a measure of the possible spill over to total exports and, hence growth.

Source: ITC, CC Research Calculations

While, we would caution against looking too much into sectorial data since the missing link is how important exports are for a given sector, we do acknowledge that the machinery and vehicles industry are, to our knowledge, more trade-exposed and hence the vulnerability here is real. In the same vein, there is evidence that the demand for luxury goods stands to suffer as Russian imports of products such as furskins and art is susceptible to a decline (see Table). Finally, we point out that the International Trade Centre (ITC) data we built on uses rather detailed sectorial classifications with machinery and vehicles for instance reported separately.

Source: ITC, CC Research Calculations