The ruble fell for a third day in a row, losing another three rubles to the dollar to reach RUB76 as of September 8. Analysts now say that it could fall to RUB80 by the end of this year before recovering to RUB72 next year because investors are spooked by revived tensions between the Kremlin and the West.
The ruble has been one of the worst-performing EM currencies recently, falling by 10% against the dollar since the start of June. Other EM currencies have been broadly flat over this period and the fall in the ruble comes in spite of a rise in the price of Brent crude over the year from $35 to $40 (around 14%), despite this week’s sell-off.
A string of bad news is undermining investors' confidence in the currency. The sanctions threat reappeared in July as allegations that Russian officials had put bounties on US soldiers in Afghanistan surfaced. The claims were later debunked.
“But the threat has broadened since then and now includes concerns about Russian interference in the US Presidential election, potential military involvement in Belarus and the use of a Novichok nerve agent against opposition leader Alexey Navalny in August,” said Liam Peach at Capital Economics.
The Kremlin’s blatant interference in the Belarusian revolution is reminiscent of the clash by proxy in Ukraine between Europe and Russia. And the stark reaction to Navalny’s poisoning has already provoked some of the strongest rhetoric from German Chancellor Angela Merkel, who is threatening to halt the construction of Nord Stream 2 gas pipeline. Plus the price of oil fell below $40 this week, down from recent highs of $45.
“The key question is whether international leaders respond and if so, what form sanctions take. So far, the US has been relatively silent on the Navalny poisoning, while EU leaders have been more vocal. It is worth noting that it took US lawmakers five months to impose sanctions after the UK Novichok poisoning in March 2018 and it may take longer this time to target those responsible, as the poisoning occurred in Russia,” added Peach.
Sanctions imposed since 2012 have, on average, resulted in falls in the ruble of 7% against the dollar between the period when sanctions were first proposed and later introduced and caused a long-lasting impact thereafter, Captial Economics said.
In 2018, when a major set of sanctions was imposed, the ruble fell by 15% between April and August, even as oil prices were rising. Past sanctions have focused on asset freezes and travel bans on individuals as well as broader measures limiting access to US financial services, but this time Germany is threatening to go further and strike at major strategic assets that would represent a major souring of relations between Berlin and Moscow.
“The US imposed sanctions independently in December against businesses building the pipeline, which delayed the project and came despite opposition from Germany. But now that Germany has indicated that it would consider targeting the pipeline, this could be an opportunity to unite with the US on a previously thorny topic. This would be a major headache for Russia and add to the pressure on local financial markets,” Peach noted.
At the start of this year economists at Capital Economics were predicting the ruble would recover to RUB67 to the dollar, but now they are saying it will probably sink further to RUB80 before the year is out.
“The Russian ruble looks set to lose further ground over the coming months as geopolitical tensions and the threat of international sanctions ratchet up. We expect the ruble to drift towards 80/$ by year end, before rebounding to 72/$ (previously 65/$) by the end of 2021,” said Peach in a note released on September 8.
The closest November futures for a barrel of Brent fell 5% on September 8 and for the first time since the end of June cost less than $40 ($39.8 per barrel by 22:00 Moscow time). The October futures for the American WTI fell in price by 5.6%, to $36.9 per barrel, reported The Bell.
September is already looking like it will be much worse for the ruble than the traditionally disastrous August. The currency has been pretty stable over the past month at RUB74.4 at both the start and end of August. It has also largely decoupled from the oil price after the government adopted the so-called budget ruble. While the last year has seen oil prices more than halved, the fall in the ruble has been much more modest and also partly buoyed by the inflow of foreign investment into Russian Ministry of Finance ruble-denominated OFZ treasury bills, which has offset much of the downward pressure from oil prices.
However, things have changed and foreign investors have been reducing their positions in OFZs, where their share has fallen from 34% to 29% in the last few months.
“The weakness in the ruble has also been mirrored by a steepening in Russia’s yield curve as long-term local currency government bond yields have drifted higher. This may partly reflect the drop in Russia’s short-term real interest rate since March, to less than 1%, which has reduced the attractiveness of Russian assets. But we think that the more likely factor is the increased threat of international sanctions,” wrote Peach.
Now the ruble is under the cutoff price when the budget rule of $42.4 kicks in, the price of oil once again directly impacts the exchange rate.
At the same time, the Central Bank of Russia (CBR) has been staying out of the FX market and keeping the money it received from the Ministry of Finance for its stake in Sberbank in reserves.
The CBR on April 10 completed its deal to sell its 50% stake in retail banking giant Sberbank to the Ministry of Finance for a reported RUB2.14 trillion ($29.1bn). The CBR has been using this money as a slush fund to support the currency if needed, but as always, has proved to be very conservative and has largely left the ruble free to float.
The short-term outlook for oil prices remains relatively bleak, The Bell reported. The recovery in demand in Asia is slow, hobbled by the coronacrisis, an increase in supply from the OPEC+ alliance, the end of the summer high season for gasoline consumption in the United States and, finally, a sell-off on the American stock market, which started to fall at the end of last week.
Sanctions risks are have already been priced into today’s ruble trading, but since there are no specifics on this issue yet, the market has remained nervous, said Natalia Orlova, chief economist at Alfa-Bank, as cited by The Bell.
The spread on where the ruble will go from here is wide. Orlova also saw the ruble at RUB67 as possible, but thought it would fluctuate around RUB75 for the meantime. The strengthening of the Russian currency may begin in November, after the US elections, she believed. This would be facilitated by the general upward mood on world markets and oil prices, which, according to Orlova, would stabilise at $50 per barrel. The chances of the ruble strengthening against the euro, which is becoming more expensive against the dollar, are less likely, she added.
The worst-case scenario for the Russian currency is a Joe Biden victory in the US election. Biden would be expected to be much more of hawk on Russia than Barack Obama, let alone US president Donald Trump.
“Geopolitical tensions have shifted so far that it has made it difficult to tell a positive story on the ruble and defend our end-year forecast of 67/$,” said Peach. “The ruble is likely to remain under pressure, particularly as the US presidential election nears due to concerns that Joe Biden may take a tougher stance on Russia and we now expect the currency to fall to 80/$ by end-2020.”
"If we remove political risks, then the main determining factors of the ruble exchange rate will be the recovery in demand, the exit from the pandemic, oil prices and the performance of the main goods of Russian exports," said economist at BCS Vladimir Tikhomirov. Without additional risks and with an oil price of $45 per barrel, the dollar would drop below RUB70 by the end of the year, he said.
Fitch was also moderately optimistic about the exchange rate of the Russian currency, predicting an average dollar rate of RUB70 in 2021 after an average of RUB70.4 in 8M20, and RUB69 in 2022.