- Ruble drops to record low as central bank intervention nears
- Political risks remain high, especially in Ukraine
- Russia and the ruble need some stability
Since early July, the ruble has been on a downward slope – fast.
Forex traders may as well have taken a ruler on July 1, when the exchange rate was 34 rubles/$, and drawn a straight line towards 40 rubles/$ on October 1.
After three months of pricing in risks and uncertainties surrounding the Russian currency, the forex market seems to have decided that if the knowns are bad enough (the sanctions; the falling oil price, the economy; the capital flight; to name a few), the unknowns might be even worse.
USDRUB official exchange rate, September 2013-October 2014
Source: www.cbr.ru
It might explain why the ruble plunged on the news on September 30 that Russia might introduce currency controls. The ruble recovered, as the central bank stepped in with some dollar/ruble swaps ($581 million) and a terse statement.
The ruble exchange rate might be already pricing in the immediate impact of the sanctions, the deteriorating economy and the Urals oil price at around $95 per barrel. It might yet adjust if there is further deterioration in the Ukrainian situation; an unexpected drop in oil production (on the lack of money and technology); and further sanctions, such as exclusion from SWIFT, which Business Week called the nuclear option.
Russia's former minister of finance Alexei Kudrin estimated that it would cost Russia at least 5% of GDp within a year.
The central bank has made it explicit in its official strategy for 2015-17 that the ruble exchange rate would be an important factor to offset the negative external shocks. It will step in when required, but the market might need to become more comfortable with the knowns and more relaxed about the unknowns for the ruble to find the new support level.
Risks that might be priced in
Broadly, the immediate economic risks and relatively pessimistic macro forecasts might be already priced in. The Economy Ministry has recently come up with a pessimistic/stress scenario for the Russian economic development for 2015-2017. Under this forecast, RUBUSD stays at around 40 in 2015, with the Urals oil price at $90 per barrel and an economic contraction.
Economy ministry and central bank's macro forecasts for 2014-2017
Source: rbc.ru, cbr.ru
The Central Bank of Russia (CBR) has published a comprehensive scenario analysis for the next three years, which also assumes low economic growth and continuous capital flight. The CBR's numbers assume the current account surplus throughout the next three years, based on healthy trade balance and little change in imports and income outflows.
Any surplus of currency is assumed to leave the country as capital flight, leaving the foreign reserves unchanged. The outlook for capital flight might be overly optimistic: $90 billion in 2014 ($74bn in 1H14), a maximum of $48bn in 2015. The central bank argues that a fair amount of capital flight early this year was internal (banks and individual converting their ruble savings into dollars) and, one assumes, is reversible.
Balance of payment forecast, 2013-2017
Source: www.cbr.ru. Note: based on scenario II of the Central Bank policy forecast for 2015-2017
The official forecasts take into account geopolitical uncertainties and the impact of the sanctions, as they stand today. The central bank's base case scenario is optimistically factoring in lifting of the mutual sanctions in 2015, which is highly unlikely. Yet, there are scenarios which assume the sanctions remain enforced.
Political risks – particularly from the crisis in Ukraine – continue to threaten the stability of the ruble, which has been on a downward slope since July. Photo: Oleksandr Khomenko Thinkstock
Risks which are hard to assess, or even forecast
The political risks remain high, especially around the situation in Ukraine. The ceasefire is holding, and there is some political process between Kiev and the separatists, but it is very uneasy and not completely satisfactory to either side.
Russia continues to press for its economic interests, asking for amendments to the Association Agreement between EU and Ukraine. The Russian suggestions are unlikely to be accepted in their current form, if nothing else, because of an amazingly inept translation of their demands in English – at least in the version which was sent to the Ukranian government and made public by www.zn.ua.
This year has been full of unusual and unpredictable events. The Russian economy and the ruble are adapting to the new economic reality, but it is unprecedented and remains highly uncertain. The main unknowns, however, are political and, as such, impossible to forecast or fully assess.
Russia needs some stability and the ruble needs a bit of healing time. Hopefully, Russian politicians understand that.