Evgeny Nadorshin, Trust Bank Chief Economist, came to the Business Today studio to talk about the rouble and Russia's economy.   

Russia Today: The Federal Reserve hinted on Tuesday that it is only alert for signals of growth. They seem to be heading open in the U.S., in the Eurozone, in Japan, in Australasia. What’s on the cards for rates in Russia?
 
Evgeny Nadorshin: It is actually a question of what you understand when saying ‘rates’. When you are speaking about the U.S. market, you mean yields, refinance rates which will increase yields of local bond. But actually when you speak about Russian finance rates, it is not relevant to the market, it is 10.5%. It is not relevant either to the bond yield or to money market which is local and which depends more on Government Central Bank’s repo rate, but not refinance rate. So speaking about rate, nothing is going to happen generally. Probably refinance rate will decrease but it won’t change much. But if you speak about rate and speak about Russia, probably you should consider exchange rate. That’s the main instrument of the Central Bank. And the exchange rate is going to appreciate definitely. So, rising, heading up.

RT: In the past the emerging markets have been the first to suffer when the global equities have been quite turbulent. But now he emerging markets have massive currency account surpluses, so they are doing very well generally. Does that mean they do not have to worry about falling out of favour with developed markets?
 
E.N.: Definitely they have to worry somehow about that because volatility which we are facing in current years is not very comfortable. Definitely, if today you can receive $US 10,000, next month you can receive $US 100 BLN – that is not comfortable. And when the next month you face an outflow of $US 100 BLN – it is completely uncomfortable. So definitely, one should take into account volatility and respect it. But to be afraid of it, like it happened for example in 1997 – it is not the case for many emerging markets by date, especially for Russia, for China. So, they shouldn’t be afraid of it, but they should take care of it and keep an eye on it, definitely.  
 
RT: So, what is the risk of this strong currency flooding the market with cheap imports and thus hindering the domestic industry?
 
E.N.: Definitely, one of the most important risks is what has been called Dutch disease – the problem of local manufacturing industries which are facing a considerable competition of imported tradable goods, and they cannot compete with them taking into account they are growing local costs. The situation is very simple. If local manufacturers cannot produce, they have to close, to go bankrupt and face many other problems. What do you have in such a case actually? In the case of Russia you have oil, gas, and some other natural resources exporters, and probably you have services which are growing locally and really rapidly. But not only problems are coming with expensive currency. What you can also receive as a local producer especially if you are facing the problem of very bad capital, like Russia for example, you can buy very cheap equipment due to operating local currency, equip yourself and get better performance, for example, than the one you had before currency began to appreciate. Actually, this is the benefit definitely, and this is what we are facing currently in Russia. A lot of companies in the manufacturing sector are now trying to re-equip and considerably increasing their investments. This is happening not only due to the considerable growth in the local domestic demand, but also due to some export activities. Taking into account several manufacturing exporters we can state some atomic industry, some other defence sector industries which are really trying to push to extend the markets.
 
RT: Ok, let’s move back globally for a minute and talk about the United States because dollar as we see is very weak against ruble at the moment. If the markets do become more stable, is it in fact America that is mostly at risk?
 
E.N.: Unfortunately for the U.S., probably yes, the situation is very uncomfortable for them because they have the so-called double-deficit problem. And with that double-deficit they are too dependent on the willingness of the so-called emerging markets to invest in the U.S.’ bonds, simply government bonds. So, for China, for Russia, for Japan only unwillingness to buy America’s treasuries could bring considerable problems to local American markets. The effect would affect considerably the emerging markets themselves, so that’s the answer why the emerging markets prefer to invest in U.S.’ bonds. But definitely, taking into account all the problems, the first strike will be taken by the U.S. at the beginning. All other which will spread probably around the whole world economy – it will be the second wave. The first threat is for the U.S. themselves.