The clock is tickin’, Mr. Putin
Today, the USDRUB exchange rate crossed above 40.00 for the first time since the ruble revaluation of 1998. Against even the Euro, the ruble has also been weakening since mid-year, though it has yet to reach the modern record low versus the Euro reached during the initial phase of the Ukraine crisis earlier this year, when EURRUB traded as weekly as 51.15 as the Euro has also been exceptionally weak in recent weeks (Currently, EURRUB trades at 50.00.)
The Russian ruble is being hit with a triple whammy of factors that have seen it underperform most major currencies in recent months. Chief among these is the strength in the US dollar driven by the Fed’s ongoing unwinding of its QE3 asset purchase programme. This is seen as a threat to global liquidity, especially emerging market economies, which have hiked rates to defend their currencies and are doubly threatened by huge USD denominated loans taken out by the private sector when USD liquidity was formerly so generous. Second, the oil price has been absolutely collapsing in recent weeks, with the globally important Brent cured benchmark some 10% lower since the early September time frame and trading below 95 dollars a barrel. The Russian government budget is highly dependent on oil export revenues and the fiscal “break-even” level for crude oil is widely believed to be well north of 110 dollars per barrel. Finally, despite the overall declaration of a kind of ceasefire in Ukraine, the longer term outcome there is far from known and financial sanctions and uncertainty continue to plague Russia from a capital flows perspective, as foreign direct investment in Russia from the West grinds to a halt and Russian capital flight is apparently bad enough that the Russian central bank has circulated the idea of capital controls – at least according to credible sources, though the Russian government has denied that it is considering capital controls. This final factor makes it clear that Russia will have an enormous challenge funding any budget gap risks from weaker oil revenues as external capital sources are effectively closed off until the confrontation over Ukraine eases and investors can see a path to the lifting of financial and trade sanctions.
From here, it is difficult to discern what can relieve the pressure on the Russian ruble versus the US dollar besides two things: first, a comprehensive settlement and path to financial, trade and military détente. Second, as the first might not even be enough, the USD strength itself must end, which is only likely if the Fed finds at some point that the currency’s strength has become a threat to the US economy or threatens deflation and thus sees the Fed backing away from the currently forecasted regime of rate hikes. This is a risk at some point, but it is likely too early in the game for such a development.
Until then, crude oil prices at these levels or low and any deepening of the gloom spreading across the world’s major equity bourses of late could keep the Ruble in a negative spiral for some time to come, towards perhaps a rate of USDRUB 45 or higher over the next six months, unless Russia government and central bank choose to mount a costly intervention or regime of capital controls.
