Page 22 - Russia OUTLOOK 2022

Thanks to the so-called budget rule, the ruble’s dependence on the oil prices has been broken. In 2020 the currency held up remarkably well after oil prices collapsed, partly due to the budget rule, but also because of the large inflows into the Russian Ministry of Finance ruble-denominated OFZ treasury bills market: oil prices were down by 50% while the ruble only fell 17%.
However, the ruble is more sensitive to geopolitics than it is to oil. With the recovery of oil prices to around $80 pre barrel the ruble strengthened from its low of RUB77 to the dollar and was approaching the analysts year end target of RUB70 when fears of a Russian military attack on Ukraine resurfaced and drove the ruble back down to RUB74.
As most investors do not expect a war to break out the ruble is expected to recover back to around the RUB70 mark in 2022, but Fitch points out that in the longer term the currency remains exposed to several risks.
“By the end of 2021 we therefore forecast the ruble to strengthen to RUB70.00/USD, from a RUB 72.44/USD at the end of 2020,” said Fitch in a note. “Our longer-term outlook for the ruble is now slightly less bullish, with our average forecast for 2022 now standing at RUB71.00/USD, compared to RUB69.00/USD previously. Lower oil prices and a potential re-pricing in interest rate expectations amid a sooner-than-expected US rate hike underpin the weaker outlook.”
The optimism on the exchange rate is based on a number of fundamental strengths Russia is enjoying now and is likely to continue to enjoy in 2022.
Oil and Gas prices in particular remain very supportive, with both commodities having appreciated by 11.1% and 32.3% in 11M21.
“Looking ahead, the near-term outlook for both commodities remains bullish, as futures markets are pricing in further upside over the coming months. Russian hydrocarbons export revenue growth, accounting for 50% of the total, should therefore remain elevated, supporting the ruble in the months ahead,” Fitch said.
The ruble’s appeal is also supported by the series of CBR rate hikes that have improved the ruble’s carry trade appeal, says Fitch. The CBR hiked rates by 425bp in 2022 which means the real yield spread over the US benchmark has been widening. That has pulled more money back into the OFZ market and so like in 2020 that is holding up the value of the currency.
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