RUB: Unrealistic optimism – Commerzbank

USD/RUB and EUR/RUB are not market-driven or floating exchange rates. Even so, at this time, these exchange rates are reflecting excessive optimism that the US administration will push for a peace treaty with Ukraine and this will involve some of the harsh sanctions on Russia being removed. We have revised our forecast path somewhat lower, but as base-case, we still see these exchange rates rising steadily. USD/RUB and EUR/RUB are not actual free-floating exchange rates at all, but ‘technical fixes’ which can only be used to transact a narrow group of energy and commodities. Hence, these rates mainly respond to changes in the trade balance of those commodities. We expect Russia’s current-account balance to narrow down from current levels over the next two years, which would be consistent with steady rouble depreciation, Commerzbank's FX analyst Tatha Ghose notes.

FX market in Russia seems to be clearly super-optimistic

"Last year, US and EU sanctions targeted the Moscow exchange (MOEX) and banned systemic energy payment processing banks, after which the rouble exchange rate became even more de-linked from underlying fundamentals. But still, USD/RUB and EUR/RUB exchange rates have at least some limited links to fundamentals (for example, via flows in CNY still being fully open, which enforces some consistency between for example USD/CNY and USD/RUB crosses). Because of such link, the rouble could recover sharply in the event that the US administration were to favour Russia and lift key sanctions. For now, we stick with our base-case that sanctions will remain in place, but the FX market in Russia seems to be clearly super-optimistic about such prospects, which has led to USD/RUB dropping sharply from above 90.0 to now 80.0 as Trump has been chasing peace talks."

"The Russian economy has performed much better than was expected by international observers after hard sanctions were imposed. Unfortunately, the data are not very reliable in recent years. At present, the economy is strong because of wartime spending and import-substitution, but momentum is beginning to fade, and the strain on the budget is becoming more visible. GDP grew by 4.3% in 2024, but we forecast it to decelerate to 1.5% in 2025. Our view is that the composition of growth will progressively diverge away from that of a competitive, modern economy towards that of a commodity producer. This will negatively affect value-added in the longer-term."

"The central bank (CBR) is now on hold after hiking rates significantly in 2024. We expect an extended pause as inflation pressures appear to be finally cooling down, but limited rate cuts before the end of the year. We forecast USD'RUB and EUR/RUB to steadily trend up in coming years: our end-2025 USD/RUB forecast is 95.0 and our end-2026 is 125.0."