The Russian ruble came under the worst selling pressure since January 2016 during a rout on the Russian capital markets caused by the imposition of new US sanctions on Russia’s top businessmen.
The falling value of the national currency may cause the Central Bank of Russia (CBR) to pause its easing cycle, say analysts. The central bank was widely expected to cut rates again at its next meeting later this month, which is needed to spur faster growth, but the drop in the ruble’s value puts that decision in danger.
The ruble closed trading on the Moscow Exchange (MOEX) on April 9 at RUB60.66/$1 and RUB74.7/€1, posting daily losses of 4.3% and 4.7%, respectively — the worst daily performance for the Russian currency since January 21, 2016 when the ruble was hit by a major decline in crude oil prices.
This time around crude prices were actually rising, with Brent futures for delivery in July this year hitting $68.5 per barrel. However, since the government reintroduced the so-called budget rule at the start of this year, the ruble has largely delinked from oil prices and has become more sensitive to fund flows in and out of Russia as well as politics.
“The ruble's recent performance is no longer driven by macro fundamentals; it is solely the result of major shifts in the political area. The way the political situation plays out in the next few days is hard, if not impossible, to forecast. That means that the ruble – as well as the wider Russian market – will remain hostage to politicians until perceived Russia-related risks start to come down and investors turn their attention back to fundamentals,” BSC Global Markets chief economist Vladimir Tikhomirov said in a note.
According to Tikhomirov’s calculations, the ruble’s fair value is in the band RUB57-58/$1, but he believes it will take several trading sessions before fundamental valuations begin to reassert themselves. And there is a danger that geopolitical tensions will continue to rise as tensions are also being fuelled by US accusations that Russia is behind a chemical weapons attack in Syria on civilians and the aftermath of the Sergei Skripal poisoning saga playing out in the UK.
“If the ruble moves to or above Rb65/$, it will likely start to have a long-lasting negative impact on the future prospects for economic growth, investment, inflation and the overall state of financial stability in Russia,” Tikhomirov says.
The sharp fall in the Russian ruble on April 10 could have more serious economic consequences if the central bank halts its easing and fails to cut rates at the April meeting.
“The situation is in a state of flux and the outlook for interest rates will depend in part on whether US sanctions escalate. But as things stand, the shift in market expectations – investors are no longer pricing in any interest rate cuts over the coming year – looks like an over-reaction,” Capital Economics said in a note.
The ruble has lost more than 8% of its value against the dollar since the start of the month as of April 10, which is fuelling the expectation of higher inflation and possibly even an interest rate hike – although so far the CBR has said it will not hike rates and is letting the ruble find its own level. However, the weakening of the ruble is changing expectations.
“Markets now expect no further monetary easing over the next year, having previously expected about 75bp of rate cuts as recently as last week,” reports Capital Economics.
However, as with the equity investors, Capital Economics believes that currency traders have probably over reacted and expect the exchange rate to stabilise before moving back towards the RUB60/$1 rate that is widely expected for this year, as Russia’s fundamentals have not been affected by sanctions that largely target the companies belonging to oligarch Oleg Deripaska.
“First, headline inflation, at 2.4% y/y last month, is well below the central bank’s 4% target – the risk of inflation breaching target in the near term is low,” Capital Economics said. “Second, history suggests that sanctions-related sell-offs in the ruble tend to be temporary. For example, when sanctions were first imposed in 2014, the ruble came under significant pressure and the central bank intervened heavily in the FX market. But this only lasted for a few days. Oil prices have, over the longterm, been the main driver of the ruble, and these would point to the currency recovering some ground.”