By Vladimir Osakovsky, Head of Macroeconomic Analysis and Research at Unicredit Securities
Russian First Deputy Prime Minister Igor Shuvalov said that the Russian government might raise import tariffs and subsidize industries to keep Russian industry competitive, Bloomberg reports. He said that the ruble is likely to appreciate over the next several years and the government may levy a tax on capital transactions in a bid to stem speculative capital inflows.
Our view: We see the statements as another sign that the government is getting increasingly concerned about RUB strength, which undermines the potential for economic recovery in the country. However, the statement also highlights the fact that the government is thinking more about protectionist moves to counter this threat, rather than of ways to weaken the ruble through monetary policy.
We see this as another argument supporting the view that the central bank’s independence is increasing, which potentially paves the way for an eventual full shift to a flexible exchange rate regime. However, we note that a protectionist economic policy directly opposes the announced general drive towards the modernization of the economy, as well as runs counter to Russia’s long-term effort to join the WTO.
Although we admit that protectionist moves could create considerable support for domestic manufacturing industries such as auto manufacturing and consumer good, we also think that the move might seriously undermine the potential for long-term economic growth. We also see the rising threat of imposition of capital transaction tax as a negative development for the RUB, which could potentially trigger some profit-taking on the Russian market. However, we continue to believe that the likelihood that such a tax will be imposed is rather low.
Conclusion: We see the statement as short-term negative news for the RUB, which could trigger capital outflow from the Russian market, especially on the wake of mounting problems in the Eurozone.
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