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14 I Companies & Markets bne May 2021
bne:FX
Geopolitics makes the Russian ruble rate highly volatile
Ben Aris in Berlin
The Russian ruble has been through some wild swings this year as it has almost completely decoupled from the price of oil and is almost entirely dependent on the ebbs and flows of geopolitical tension.
The US imposed new sanctions on April 15 that ban US inves- tors from participating in the primary Russian Ministry of Finance ruble-denominated OFZ treasury bills market but allow purchases on the secondary market and so will have little impact on investors.
As Russian state-owned banks are very big players in the OFZ market – the state-owned banks have bought at least half the issues at recent auctions – it is simple matter for a US investor to immediately load up on as many OFZ as they want, buying them from a state-owned bank.
The exchange rate reaction to the details of the new sanc- tions was muted and the ruble strengthened from its recent low of RUB77.7 to the dollar to open at RUB76.2 on the following morning, still slightly weaker than the RUB75.4 it touch on earlier in the week following US president Joe Biden’s offer of a summit to Russian President Vladimir Putin.
The current market quotes have already largely included
not only the sanctions, but also the likelihood of tougher sanctions on the public debt market, says Sofya Donets, chief economist at Renaissance Capital for Russia. She sees the potential for the ruble to strengthen in almost any scenario: "If more significant sanctions await us in the future, if oil prices remain at the current level, it could be 74 against the dollar in the second half of 2021, if there are no new signifi- cant sanctions – 69"
Economists say that the exchange rate should be at something like RUB68 to the dollar, based purely on macroeconomic fun- damentals. But Russia has always carried its very own “Russia risk” premium in addition to the run of the mill “emerging market risk” premium, thanks to its prickly relations with the West, deeply entrenched corruption and its arsenal of nuclear weapons, which come with built-in tensions that the other emerging markets don't have.
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The ruble has been going through 10% swings in the last few months as it has become victim to unpredictable geopolitical tensions.
And that RUB68 level is applicable following the 2014 oil shock. Before that, the ruble was trading at about RUB35 to dollar, but the price war started by Kingdom of Saudi Arabia to try to kill off US shale production meant the Russian currency took a permanent step down in value to the greenback.
Another factor weighing on the relationship between the ruble and oil prices is the so-called budget rule that automatically sterilises any oil revenues the government earns when prices go above $42 per barrel. The excess income is squirreled away into the National Welfare Fund (NWF) and taken off the mar- ket so it cannot affect the exchange rate. The rule was briefly suspended in 2014 and again in 2020, but it is back in place now as oil prices return to around the $60 mark.
Recent political history is written large over the FX chart. After collapsing to a low of about RUB80 vs the dollar in the bowl of the coronacrisis last summer, when oil prices fell to
“ABC News' George Stephanopoulos asked Biden if he thought Putin was a killer and Biden mumbled “I do.”
The ruble immediately tanked”
below $30, the Russian currency staged a strong recovery as commodity and oil prices bounced back from October in anticipation of the end of the pandemic once the vaccines started appearing.
But at the start of this year the ruble was trading at around RUB74 and even strengthened a bit as it became clear that US President Donald Trump was going to lose.
FX traders had their first case of the collywobbles as they began to focus on what Biden was going to do about Rus- sia. Biden was inaugurated on January 20, and the next day marked the strongest for the ruble in the first quarter at RUB73.3. But within a matter of days Biden gave his first foreign policy speech on February 2, which contained some