The Russian Ruble Is Again The World’s Most Under-Valued Currency
The Big Mac Index Shows The Russian Ruble Is Undervalued By 70%
The Economist Magazine has just published its annual “Big Mac Index” in which it measures the strength of global currencies based upon the bench-mark price of a Big Mac burger in the United States. If the price of a Big Mac in dollar terms is higher than in the US, then the corresponding currency is considered overvalued, and if it is lower, then vice versa. It shows both currency strengths and the role of the United States in manipulating the economic strength of countries it wishes to artificially subdue in terms of their ability to purchase goods internationally.
The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (in this case, a burger) in any two countries.
The Russian ruble has again become the most undervalued currency in the world, when according to the Big Mac index, at present a Big Mac in the US costs US$5.81 (about 444 rubles), while in Russia it costs 135 rubles, or US$1.77. Thus, the fair exchange rate of the Russian currency should be 23.24 rubles per dollar. Instead, it is trading at 76 to the dollar, suppressed in value to 1/3 of what its true rate should be. The Russian economy is in fact the world’s 12th largest with a GDP of US$1.7 trillion and grew by 4.1% in 2021.
Associate Professor of the Russian University of Economics. G.V. Plekhanov Denis Domashchenko stated that the ruble has become one of the most undervalued currencies in the Big Mac Index, since McDonalds can still operate profitably with such low prices in the Russian market in terms of the cost of production, wages, rent of premises and other expenses.
The second of the most undervalued currencies is the Turkish lira (underestimated by 67.9%), which was specifically targeted by the United States in response to perceived anti-Western reforms introduced by President Erdogan. The Turkish economy is also significant, being the world’s 18th largest with a GDP nearing the trillion-dollar mark at US$810 billion. It grew at a rate of 10.5% in 2021.
On the other end of the scale, just two currencies are overvalued – the Swiss franc (by 20.2%) and the Norwegian krone (by 10%). In previous ratings, the Swedish krona was also included in this list, now it is considered undervalued by 0.4%. With all other currencies undervalued against the US dollar, the implication is that the base currency itself is significantly overvalued in global terms. This has led in turn to increasing opinions that global currencies should once again return to a type of commodity standard as the Gold Standard used to be instead of being based on US debt.
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