Russian rouble: entering turbulence again

• Rouble weakens on oil, dovish central bank and geopolitics.

• Slowing inflation supports further cuts.

Assessment and outlook

Remaining the best performer among 155 foreign currencies for spot returns against the USD YTD, the Russian rouble has entered a new zone of turbulence. Again. Returning 8.2% YTD against the USD, the rouble has lost more than 10% within the last 30 days as news about escalating tensions in Eastern Ukraine has started to hit the wires. Short-term support from oil has vanished, with Brent having clearly lost its position at USD65/bbl.

Despite denying any currency targeting, the Bank of Russia (CBR) and Finance Ministry continue to pursue policies which weigh further on the rouble. With pressure from outstanding external FX corporate debt easing, the CBR has suspended its one year FX repo auctions introduced in Q4 14 to address the acute shortage of FX funding caused by financial sanctions from Western countries against Russia. In May 2015, the CBR and Finance Ministry started to buy currency to replenish FX reserves, which had dropped to levels lower than during the 2009 crisis year. The CBR’s daily purchases have been around USD150-200m, which we don’t consider sufficient on their own to weigh on the rouble. However, used in combination with other tools, the purchases have been calming the rouble’s appreciation.

On 4 June 2015, CBR Governor Elvira Nabiullina and First Deputy Governor Dmitry Tulin stated that the bank will boost its reserves to USD500bn from the current USD357bn within the next three-five years. The statement was rouble-negative, sending a signal to the market that the CBR has long-term tools to keep the rouble from additional strengthening if needed. We see the latest moves by the financial authorities as justified considering the current oil price (Brent’s average for the last 30 days was USD65/bbl). The ‘fair’ value of the USDRUB (balancing the budget) is around 58.00-60.00. Another factor weighing on the rouble in the short term will be dividend payments by Russian corporate giants, which are set to pay almost RUB900bn by the end of July 2015, causing a USD10bn flow from the rouble into FX.

Inflation slowed to 15.8% y/y in May 2015 from 16.4% y/y in April, helped by lower food inflation (20.2% y/y versus 21.9% y/y). As the downward trend continues, we expect the CBR to retain its dovish monetary policy, with a 100bp cut in the key rate on 15 June 2015. The dovish stand supports our current FX forecast (introduced on 13 May) for the USDRUB (60 (3M), 63 (6M), and 70 (12M)). However, we continue to see geopolitical risks weighing on sentiment as the major downside risk to the rouble.