(Bloomberg) -- Bank of Russia’s easing run is looking more and more like a thing of the past.
The poisoning of Russian opposition leader Alexey Navalny with a military-grade nerve agent has triggered the strongest threat of new sanctions against Russia in months, battering the nation’s bonds and currency. While half the economists surveyed by Bloomberg forecast a quarter-point cut on Sept. 18, the weak ruble is adding to the reasons for Governor Elvira Nabiullina to keep interest rates on hold.
“Geopolitical headlines, such as the Navalny case, as well as the likely increased turbulence ahead of U.S. elections, will continue to weigh on the ruble and local currency bonds,” said Jens Nystedt, a New York-based senior portfolio manager at Emso Asset.
Only the Turkish lira has performed worse than the ruble in the past three months. Even before Germany called for a coordinated response to Navalny’s poisoning, investors were on edge over the possibility of Russia intervening in neighboring Belarus, where protesters have called for an end to President Alexander Lukashenko’s 26-year rule. And the prospect of a win for Joe Biden in the November presidential vote could mean a tougher approach to Russia from Washington.
“If the ruble stays at the current level of 75.5-76 per dollar, then there is an increasing chance the central bank will remain on hold,” Renaissance Capital Chief Economist Sofya Donets said by phone from Moscow.
Russia’s bond and derivatives markets have hinted at the end of easing for weeks. A rally in local debt, which took yields to a record low, ended in late May. Since the last central bank decision in July, when Nabiullina delivered her smallest cut in months, forward-rate agreements have shown rates almost unchanged over the coming three months.
Beyond the geopolitics and weak ruble, there are positive arguments for a pause.
Since the last meeting, the Economy Ministry has improved its 2020 outlook and Kremlin economic aide Maxim Oreshkin has said Russian business should recover without new state support. Gauges of manufacturing and services industries beat forecasts by a wide margin this week. Inflation, while still below target, is predicted to have continued accelerating in August.
The economic recovery, and accompanying rebound in oil prices since April, are a reminder that the nation’s fundamentals are strong. While the ruble’s drop on Wednesday was its biggest since the peak of the market rout this year, any easing in tensions, or international penalties that are deemed mild, could spark a rebound.
“Over the longer term, improved relations between Russia and the West would benefit Russian assets significantly,” said Emso’s Nystedt. “But over the next few months focus will be elsewhere.”