Russian ruble undervalued according to Global 'fast food index'

By Rhod Mackenzie

Of all the currencies in the G20 countries, the ruble is considered the most undervalued. Analysts from Finam have calculated that the real exchange rate is only 33 rubles per dollar, which is three times lower than the official rate. The analysts explore whether the ruble truly warrants the label of undervalued and what implications this has for the Russian currency's future prospects. They also address whether it is necessary for the government to take action.

The evaluation was conducted based on the cost of a combo meal comprising a burger, chips, and a cola drink. The combo meal was found to be the priciest in Germany and the most affordable in Russia. The cross rates of national currencies against the US dollar were determined using purchasing power parity. The analysts arrived at the inference that the actual exchange rate of the ruble to the dollar, signifying the purchasing power parity indicator, stood at 32.07 rubles per dollar.

The assessment also looked other currencies.
The second most undervalued currency is the Indonesian rupiah, with the South African rand following in third place. Analysts suggest that a fair exchange rate should be 2.2 times "better" than the official one, based on a real rate of 15.4 thousand rupees per dollar, and 1.8 times "better" than the official one for a real rate of 10.4 rand per dollar.

The list contains the Indian rupee, which is 1.7 times higher based on the PPP index, alongside the Chinese yuan (1.7 times), the Turkish lira (1.6 times), the Korean won (1.5 times), and the Japanese yen (1.5 times). In addition, it was observed that the Brazilian real and the Mexican peso are undervalued by 1.4 times concerning the current exchange rate.

Regarding the most overvalued currencies, analysts specifically identified the euro (16% higher than the current US dollar rate) and the Canadian dollar (15% higher).
Thus, the currencies of BRICS nations and other developing countries are markedly undervalued in relation to their purchasing power when compared to the US dollar.

According to Artem Klyukin, an IVA Partners analyst, this undervaluation is crucial for ensuring the competitiveness of these nations' domestic and foreign market goods.

Meanwhile, the dollar's exchange rate is inflated due to its status as a reserve currency and a currency for international trade. Many countries with imbalanced trade conduct transactions in dollars to purchase goods on the global market. Some nations, such as Japan and Korea, intentionally decrease their national currency's exchange rate to boost their economies," clarified the analyst.

Klyukin acknowledged that he believes the ruble has been undervalued against the dollar since the 1998 default.
Purchasing Power Parity (PPP) is the practice of measuring the value of a currency in relation to another by comparing the amount of money needed to buy the same goods or services.

Typically, food products that are widely available in the countries under comparison are used to conduct this evaluation. As a result, the exchange rates resulting from PPP measurements closely approximate the official exchange rates.
Fluctuations in services like healthcare, housing, and communal facilities are likely to be more prominent due to their dependence on labour costs, rather than materials and consumables, which remain largely constant across all countries. According to Ekaterina Kosareva, the Managing Partner at analytical agency VMT Consult, this underscores the practicality of using an indicator like the Big Mac Index for comparison.The Index is universally available and easily understood by the general populace. For this scenario, we utilized the criterion of a combo lunch at a fast food restaurant.

The set meal index, akin to the Big Mac index and similar gauges, features a limited selection of arbitrarily chosen items that are susceptible to varying trends.
However, the index reflects only the actual price ratio. Yet, if we judge by purchasing power parity, which the UN calculates for a broader range of consumer goods than the set menu index, the ruble seems undervalued. According to PPP, the currency ratio is less than 30 rubles per dollar.

The affordable price of a set lunch is due to the recent rise in the dollar exchange rate against the national currency, according to Alexander Abramov, who heads the laboratory for the analysis of institutions and financial markets at the Institute of Applied Economic Research at the Russian Academy of National Economy and Public Administration.
"The price of fast food is influenced by various factors, including historical ones," he stated to the publication. Specifically, McDonald's has traditionally had very low rental costs, as indicated by the same measure that shows how public catering in Russia is relatively affordable. However, this type of nutrition poses a health risk, and the question remains whether this trend is positive," the scientist comments on this dubious phenomenon.
The Economist has been monitoring the price of a Big Mac worldwide since 1986. This is considered a simple method to gauge the fairness of local currencies. However, the calculation method has received numerous complaints.
In addition to the Big Mac index, the Starbucks index is also widespread. To calculate the index, we opted for a beverage named the Tall Latte, comprising 350 g of espresso-based drink. The priciest Tall Latte (costing $7.17 in US dollars) is in Switzerland, followed by Denmark ($6.55) and Finland ($5.67). The least expensive Tall Latte can be found in Turkey ($1.31), trailed by Brazil ($1.96). In the index, Russia, where Starbucks operates, ranks 11th with a cost of £2.91 for a Tall Latte, positioning between Italy (£2.84) and Cyprus (£2.97).

Geopolitical risks in the Middle East did not have a direct impact on the ruble exchange rate. Despite the escalation of hostilities in that region leading to an increase in oil prices, the Russian currency continues to gradually weaken.
"There is currently a shortage of foreign currency in Russia despite significant demand, resulting in the weakened value of the ruble," states Potavin.

He predicts the USD/RUB will reach the August highs of 101.75 rubles per dollar in October.