Mongolia Brief December 23, 2014 Part V

Falling RUB exchange rate to benefit Mongolia

December 24 (UB Post) The USD to RUB exchange rate fell by some 45 percent this year due to the drastic decline in global oil prices and the prolonged crisis in Ukraine. The exchange rates of the RUB and MNT have shown some similar characteristics.

At the beginning of 2014, one RUB equaled 51 MNT, but now stands at 33.8 MNT. Although the reasons and factors for decline are different, the foreign exchange reserves of both Mongolia and Russia have been exhausted as the currency value has dropped.

The value of the MNT against primary currencies exchanged (USD, EUR and CNY) has fallen by nearly 30 percent since the beginning of 2014, weakening the purchasing power of residents. Even Russia hasn’t been able to escape rising prices and public discontent over current fluctuations.

Russia reported that they’ve made interventions of over 30 million USD from the start of 2014 until November 10. A few days ago, they spent 1.9 million USD in a single day. Intervening measures being taken by the Central Bank of Russia aren’t showing results and the exchange rate of the RUB continues to drop.

On December 22, oil prices in the global market rose slightly, reverting back to over 60 USD per barrel. This brought the first good news in a long time to Russia, as the USD to RUB exchange rate increased by 3.6 percent and EUR to RUB by 4.5 percent. On the same day, China expressed its readiness to support Russia in overcoming the crisis. While some experts and economists believe that the fall of the RUB exchange rate will not last long, some estimate the current USD exchange rate of 56.33 RUB to skyrocket to 150 RUB by February 2015.

How will the RUB affect Mongolia?

Besides fuel importation, Mongolia and Russia conduct major trade. The two countries were able to conclude a visa-free regime between Russia and Mongolia in November and set higher goals for expanding cooperation in trade.

Regarding the initial task to develop a swap agreement for currency between the central banks of Russia and Mongolia and negotiating trade in RUB, changes to the RUB exchange rate are becoming more significant for Mongolia. If fuel payment is finalized in RUB, Mongolia will be able to not only save up to approximately 1.4 million USD spent annually on fuel payment, but it will also be able to lower fuel prices.

Some economists and experts clarified how the fall of the RUB will benefit Mongolia.

Retail prices for petrol should be dropping by 10 to 20 percent

President of the Mongolian Exporters’ Association D.Galsandorj:

Trade between Mongolia and Russia isn’t that small. Mongolia imports many products from Russia. Almost 100 percent of Mongolia’s petroleum products are imported. The cost of imports will decrease as the RUB exchange rate falls by 40 percent, meaning that the price of petroleum products and equipment for mining and other sectors will drop.

Secondly, it’s possible for the price of vegetables coming from Russia to decrease. Simply put, it’s a positive change for Mongolia. It’s very beneficial to traders since a visa-free regime has been in place since November 14.

Russia is taking effective countermeasures against a RUB exchange rate decline, so the crisis will not last long. Mongolian importers, particularly, petroleum importers, can benefit during this short period. Petroleum product prices are dropping globally. Yet, the retail price of petrol isn’t dropping domestically. Conditions for the price to drop by 10 to 20 percent are already complete. It was even mentioned by the parliament. Unfortunately, the price hasn’t dropped. Neither the government nor the Ministry of Finance is investigating suitable petrol prices. As the market price drops, wholesale and retail prices for import products should decrease. In the market, petroleum product prices fell by 40 percent. On top of that, the RUB exchange rate weakened by some 40 percent. Under such conditions, petrol prices should be lowered. Just like how petrol prices increase when international market prices increase, petrol prices should be reduced when international prices decrease.

The RUB exchange rate’s rise and fall can be regulated if the two countries begin negotiating a swap agreement.

Falling RUB exchange rate can bring advantages and disadvantages

Russian scholar and Mongolist Yuri Nikolaevich Kruchkin:

Current conditions of the RUB have both benefits and drawbacks. For example, purchasing petrol in RUB will become beneficial. America has pursued a policy on developing USD as the main global currency for a long time. If Mongolia wishes to reduce its economic dependence on USD fluctuation, it’ll be better to conduct foreign trade, particularly for petrol, in RUB with Russia. I don’t think RUB exchange rate changes will directly affect the economy of Mongolia.

A big advantage will result if the MNT rises and RUB drops

Chief Executive of Prime Info LLC A.Bilguun:

The fall of the RUB exchange rate is good for Mongolia’s economy. It only means that Russian income is decreasing. As for us, prices of imports are becoming cheaper and our options and alternatives are multiplying. Opportunities for Russia proposing cheaper prices than China are becoming available. If the MNT exchange rate increases while the RUB rate drops, Mongolian foreign trade will gain a huge advantage. The same goes for a swap agreement. RUB fluctuation is more beneficial for Mongolia because the country that’s losing more will give up more money, even if both countries generate the same amount of currency. Mongolia will gain more as the RUB exchange rate falls.

Compared to USD, exchange rate of MNT and RUB will be more stable

Director at the Economic Policy and Competitiveness Research Center B.Lakshmi:

Purchasing petrol with RUB is relatively more beneficial to Mongolia. Compared to USD, observations show that the exchange rate of the MNT and RUB will be more stable. The falling RUB exchange rate is profitable for both import and export. I see that it will become a big advantage for Mongolia, which has limited foreign trade because the economy is too dependent on USD.

Source: Undesnii Shuudan

Link to article