Russian rouble: calm on Greece, nervous on oil

• Rouble weakens on oil, resilient to Greece.

• We expect rouble’s moderate weakening to continue.

• We recommend keeping high hedging ratios on RUB receivables against the EUR in the long-run.

Assessment and outlook

Moving from the first to the third best performer among 155 foreign currencies for spot returns against the USD YTD, the Russian rouble has continued its moderate weakening during the past 30 days. Returning 6.3% YTD against the USD, the rouble has lost more than 1.7% within the last 30 days as the Brent price slid 11.5% within the same period. Our fair value model for the rouble based on oil price suggests that the Russian currency remains overvalued. Simultaneously, Russia’s central bank continued to replenish its FX reserves, buying USD3.9bn since 5 June 2015. 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. The Russian rouble, stocks and rouble-denominated sovereign debt did not respond dramatically to the news from Greece either before or after the Greek referendum on 5 July 2015. During the pre-referendum week the rouble fluctuated ±1.3%, mostly following the path of the oil price. On Monday 6 July, after 61% of Greek voters said ‘no’ to the creditors’ conditions, the rouble stayed calm while Russia’s stock index Micex closed 1% lower from its closing last Friday. Rouble-denominated OFZ 2027 yields rose 14bp, closing at 11.07%.

As the status quo continues in the geopolitical environment around the Ukraine crisis, with news flow fairly muted, the main driver for the rouble remains the sliding oil price, which is partly associated with rising concerns about the eurozone’s economic prospects, and partly responding to expectations about a possible revocation of sanctions on Iran. We have not seen concern from the CBR about the continued weakening. On the other hand, we expect the central bank to refrain from any rouble purchases as the USD/RUB stays under 60.00. Given the feeble oil price in roubles, the current spot price has lingered at inconvenient levels for the budget and the Russian economy.

The current macroeconomic situation is not making the rouble’s long-term prospects any brighter. Despite an ongoing slowdown in consumer price inflation (15.3% y/y in June from 15.8% y/y in May and 16.4% y/y in April), the Russian economy continues to shrink, contracting 4.9% y/y in May 2015 as private consumption dives and credit conditions still remain tight. FDI flows have stayed negative since Q3 14 which was not even seen during the crisis 2008-2009.

We remain bearish on the rouble, reiterating our current forecasts for the USD/RUB: 60.00 as of 15 September 2015, 63.00 as of 15 December 2015 and 70.00 as of 15 June 2016. We recommend keeping hedge ratios for RUB receivables high against the euro, especially in the long run, seeing forward hedging as favourable at the current levels.