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How the US Debt Deal Affects Russia

The recent deal to raise the debt ceiling and avoid an unprecedented national default in the US brings significant global changes. Firstly, the world will no longer see the US dollar as a strong safe-haven currency. The dollar has now gone down to the level of other currencies, which means that many may start to question its status as the main reserve currency.

The US debt deal is helping to resolve the situation in the US only temporarily. Unless the world markets see that there are significant adjustments to the way the US economy is run, the trust in dollar will not be restored.

We all know that when America gets a cold the rest of the world gets fear. In Russia the fever will be felt immediately. Its economy remains much dollarised. An average Russian person still believes that the dollar is the most powerful currency in the world. Most people prefer dollars to rubles, just like 15-20 years ago. Even though all official transactions now are now done in rubles, the dollar still plays a very important role for black and grey market payments.

Russia’s dependency on the US dollar has been subject of a long-standing dilemma for the Central Bank of Russia. The currency policy of the Central Bank has been unpredictable so far. The exchange rate between the rouble and the dollar is not free floating. Even though the Central Bank does not acknowledge this, the exchange rate is adjusted. For these reasons, it is much more important for the Russian economy to know what the Central Bank thinks about the dollar, rather than what the world thinks about it.

I would struggle to give any assessment as to what prospects the rouble as currency faces, mainly for two reasons. Firstly, the current policy of Central Bank does not allow for a free float of rouble. Secondly, the Russian economy is very dependent on commodities prices. Currently the income from natural resources is around 60% of the total income of the Russian economy, while last year it was 50%. This increase is a worrying trend. Another worrying trend in the Russian economy is its dependency on the oil prices (currently the price is $115-120). A decrease in oil price may lead to a sharp decline in the rouble exchange rate. This demonstrates that rouble is not a strong currency and therefore strong dollar and stable US economy is so important for Russia.

Russian economy will continue to be completely dependent on the US dollar, oil prices and prices of other natural resources for as long as the talks about the need to modernise the country and its economy remain just talks. What Russia needs is to create and grow an internal consumer goods market, which is practically non-existent at present. Here is one example. Russia does not produce quality toilet paper. Investlesprom was one of a very few enterprises that started developing this production, but they may be forced to close it. What is happening in Russia at present can be illustrated in the following way: Russian people are extracting oil and other natural resources, selling it for dollars to other countries, then with these dollars they are buying toilet paper, which then goes down the toilet. So are we letting our oil go down the toilet?