The Ruble has been one of the best-performing currencies this year, buoyed by large commodity exports at soaring prices and a drop in importing activity due to sanctions, exacerbating the hefty fees and negative interest rates that banks impose on currencies from "unfriendly" countries. Nonetheless, the ruble is 25% lower than a seven-year high reached at the end of June after the government pledged to devalue its currency.
Broad Market Range:
The RUBINR pair has broadly moved in a range of RUB 0.90/INR and RUB 1.20/INR (figure 1) in the last 5 years.
However, this narrative changed dramatically after Russia invaded Ukraine. The pair saw swings to as low as RUB 0.46/INR and as high as RUB 1.48/INR (figure 2).
RUBINR appreciated by 200% from the low formed in March (beginning of the war) but in the overall context, a comparison to the 5-year average shows an appreciation of nearly 50%
A similar narrative can be observed for USDRUB which ranged between RUB 55/USD and RUB 81/USD for the past five years. The pair experienced a rapid rise to RUB 150/USD post the Ukraine war (although it was thinly traded) post which it experienced a correction to a price level of RUB 50/USD (figure 3).
Implications of Sanctions:
Financial sanctions were imposed by the western nations that froze Russian foreign currency accounts. It was widely expected that this would result in the collapse of the Ruble, however, this reaction lasted for 10 days post which Ruble became the strongest performing currency against the US dollar this year. In late May, Ruble saw a dip backed by loosening capital controls by the Russian Central Bank which was temporary in nature as the pair began a new cycle of strengthening this week.
How has the Ruble appreciated despite sanctions?
Post sanctions by NATO, Russia imposed severe restrictions on the outflow of foreign exchange. Russia's central bank also propped up the Ruble with strict capital controls. This makes it harder to convert it to other currencies. This includes a ban on foreign holders of Russian stock and bonds taking dividend payments out of the country which used to be a significant source of outflow.
Apart from these measures, Russian exporters were also required to convert half of their excess revenues into Rubles, creating demand for the currency. (The conversion requirement was 80% until the end of May, post which it dropped to 50%.)
The narrative of commodities:
The dramatic rise in fuel prices along with the demand for payment in Rubles added to the strength of the currency. Many countries have started to comply with this as they are heavily dependent on Russian oil. This is one of the main reasons why the currency continues to be strong even after the relaxation of some FX restrictions. Moscow has been selling crude at a hefty discount to the international price, which is still higher than the pre-war prices and even with the sanctions, Russian crude oil exports are higher than the pre-war scenario, contrary to the dire forecasts. Apart from rising in crude price, there has been a rise in the price of many other commodities like Nickel, Platinum, Steel, Fertilizers, etc. Russia is a significant exporter of these commodities. The rise in prices of these commodities has been so strong that they made up for the export embargo faced by the country.
The overall impact on the Russian Economy:
Western sanctions and a wave of businesses leaving the country have led to a drop in imports. In the first four months of the year, Russia's current account surplus — the difference between exports and imports — rose to a record $96 billion. While all these have resulted in a strong currency it is not a free market-determined exchange rate. But the Ruble’s stability at the same time is 'real,' in the sense that it's driven by Russia's all-time high current account inflows.
Even though Brent prices have risen substantially, Russia is only able to export at a discount of USD 35 below market Brent prices. With fears of recession affecting demand for crude oil, prices may drop in the coming days, affecting Russian export earnings.
Many countries are reluctant to import from Russia for fear of reputational risk.
The decision by Europe to ban Russian oil imports is another development that will affect Russian exports and as a result, weaken their currency. Though this decision will get implemented in the next six months (December 2022) and Europe is still importing large amounts of oil from the country, it will eventually affect Russian trade. It should be noted that the EU accounts for nearly 35% of the Russian oil export and the ban results in cutting off about 90% of the Russian oil. Another measure taken by Europe is to ban EU companies from providing technical assistance, brokering services, or financing or financial assistance, related to the transport (including through ship-to-ship transfers, to third countries importing crude oil or petroleum products from Russia) of Russian goods which even the UK is expected to follow. Cutting off shipping insurance and reinsurance from the European Union and the United Kingdom—the heart of the maritime insurance industry will hinder Russia’s ability to redirect crude oil and petroleum products to other regions. Ship-owners will be reluctant to lift Russian cargoes that cannot be insured or reinsured, and such vessels could even be barred from some ports.
Russia always had a positive trade balance for more than 2 decades and that has grown substantially since August 2020 (from USD 3 billion to USD 27 billion in January 2022). Notwithstanding the sanctions, demand for key commodities including food, and the elevated prices will keep the same high for some time. Capital controls will likely stay for as long as the Western nations don’t withdraw the sanctions (which is not expected to be done in the foreseeable future). Due to dependence on key commodities, countries would be prepared to make settlements in the Ruble. The currency is also immune to the rise in the dollar against most currencies due to safe haven and interest rate attractions. With the 2-year benchmark rate at 8.68%, the Russian interest rate will dissuade the local investors from converting to other currencies, though foreign investor interest will be missing.
These factors will ensure that the RUB stays strong for several months.
However, weakness may erupt as and when the Russian Central Bank relaxes capital controls which depend on geopolitical developments.
After an unprecedented rise of over 150%, it is difficult to see many gains for the Ruble from the current level of RUB 50/USD. The further rise may erode the advantage of discounts on the oil price offered by Russia. On the monthly chart, 200 monthly moving averages are at RUB 50.88/USD which should hold and trigger a correction. However, on a break of RUB 50/USD, a drop to RUB 43/USD is possible. In view of the large moves seen, even the minimum retracement of 23.6% Fibonacci indicates a level of RUB 74.06/USD. That translates to INR 105/Ruble from the current level of INR 156/Ruble. An early indication of the reversal is if it starts to trade above RUB 59.00/USD. Almus will keep watching the geopolitical developments and the oil price trends in the coming days.
Prepared by Jayaram Krishnamurthy.
COO & Co-Founder,
Almus Risk Consulting LLP.