Will a weaker ruble really be good for Russia

The Russian government has suggested that the slide in the value of the ruble may have a silver lining, but will it really help perk up the sluggish economy or just crimp consumption by consumers? The ruble has been caught up in the sell off of emerging market currencies, losing about 6.5 percent of its value against the dollar in recent weeks to hit a five-year low of more the 35 to the greenback. And it has slid by around 5 percent to a new record low of more than 48 rubles to euro. However Economy Minister Alexei Ulyukayev looked to the bright side of things. "This will help improve the competitiveness of a range of industries," he told Moscow's Prime business news agency. "I am not a proponent of stimulating the economy through an artificial weakening of the ruble," said Ulyukayev. "But since what we have now is not an artificial but a natural weakening ... then why not enjoy its positive effects?" he asked. The government will feel an immediate boost as most of its budget revenue is from the export of gas and oil, which are sold for dollars. The budget deficit was reduced to 0.5 percent of gross domestic product last year thanks to higher oil prices. But with growth at just 1.3 percent -- a quarter of the Kremlin's target -- there is not enough funds for President Vladimir Putin to fulfil his 2012 election campaign promises. "All the increases in social benefits will be financed," noted the daily Vedomosti. "Of course with rubles that are worth less, but they will be financed." Economist Nikolai Petrov at Moscow's Higher School of Economics believes the ruble's slide was intended. "The government, which is trying to make ends meet and must find 15 billion dollars for Ukraine, went consciously in that direction," he told AFP. The budget pinch has led the government to hold off on financing several flagship projects that are designed to boost growth, such as the high-speed rail link between Moscow and the city of Kazan to the east. Industry Minister Denis Manturov estimated Friday that the weaker ruble "probably provides more advantages than disadvantages". Russian industry is stagnating, growing just 0.3 percent in 2013. It is widely seen as being uncompetitive and have been poorly equipped to handle the country's entry into the World Trade Organization last year. A weaker ruble will thus make Russian products cheaper on foreign markets, raising hopes for an export boost. However economist Chris Weafer at Macro Advisory noted that Russia does not produce many machine tools or consumer goods that would benefit most from a weaker ruble. More likely the benefit would come from product substitution, that is Russian's faced with sharply higher prices for imported goods would turn to more domestic products. But a weaker ruble could entice more companies to set up shop in Russia, noted economist Yakov Mirkin in the Russky Reporter magazine. "For foreigners it will become cheaper to hire Russians and we will become more competitive for foreign investments. And we have great need to modernise," he said. Having lived through devaluations during the Soviet period and and again in 1998 and 2009, Russians have been watching the sharp slide of the ruble with trepidation. The subject dominates the news and conversation. A sharp drop in the value of the ruble makes foreign travel less accessible for Russians and drives up the prices of imported consumer goods. As imported products make up a third of the average consumer's monthly purchases, the drop in the value of the ruble is quickly felt as purchasing power is reduced. A weakening currency usually fuels inflation as the cost of imported goods rises, which then leads to higher interest rates. With consumer credit having become more widespread, many Russians could face higher interest rates on their loans if inflation accelerates from the 6.5 percent registered last year. The country's largest bank, Sberbank, said Friday it has no intention of raising loan rates for the moment. Higher interest rates would dampen not only further consumer consumption, but investment by businesses, becoming a drag on future economic growth.