Ruble Slide Continues After Russian Central Bank Raises Rates 100bps

Russia’s Central Bank (CBR) in a fight to arrest the plummeting Russian Ruble hiked rates by a more-than-expected 100 basis points. The bank pointed to rising inflationary pressures. The central bank raised its key rate to 8.5% surprised analysts polled by Reuters, with a 50-basis-point hike the consensus. The ruble was 0.4% weaker against the dollar at 90.62 and 0.2% weaker at 100.73 versus the euro. It also dropped 0.1% against the yuan to 12.59. The ruble also felt the pressure of risk-off sentiment hitting Russian assets before the weekend. This comes after Russia bombed Ukraine ports days after not renewing the Black Sea grain deal.

It has been a volatile few years for Russian interest rates and the ruble. To arrest the collapse of the currency after Russia’s move to invade Ukraine on Feb. 24 the CBR performed an emergency rate increase to 20%. From there the CBR slashed its key rate to try and rescue the Russian economy. Russia enforced capital controls which led to the ruble becoming the world’s best-performing currency off that bounce for a time.

From there the ruble has sold off steadily since with sanctions, inflation, an ongoing war and economic isolation outside its largely BRICs fan base. Financial stability risks are an ongoing overhang.

This brings us back to the risk of higher rates in these times 15 months after the invasion. In theory they should make investments in Russian assets more appealing. However, no one outside of that fanbase group, who are all facing their own issue has any inclination to at this point. Traders then look to the negative impact on economic growth by making credit more expensive.

Geopolitical risk went up a notch, pressuring the Russian currency after an abortive armed mutiny by the Wagner mercenary group in late June. The move harmed Putin’s leadership position to those outside Russia that may have been tempted to invest in Russia. Since then, we have also seen attacks on Russian infrastructure have further dampened risk appetite.

The party line is that the ruble weakness comes all from falling exports and a rebound in imports. Russia’s balance of payments was negative in June for the first time since 2020. With more export revenues paid for in rubles the weakness feeds on itself. With Russia receiving a reduced amount of its foreign trade surplus in foreign currency.

Russian Natural Gas Replaced

The weakened currency price also has a limited customer base with sanctions and switching to alternative as we have seen in natural gas with Norway now replacing Russia as the biggest anergy supplier to Europe. On top of that we have LNG and coal exports from the U.S., Australia and Qatar. In short any benefit from a so-called J curve effect on the currency are severely hampered.

All that is left of Russian gas flows to Europe is one operating point in Ukraine via Sudzha. TurkStream the only other pipeline still in operation supplies gas to Russia ‘friendly’ nations. Nord Stream I and II pipelines damaged by explosions, zero flows to Europe. LNG plus Norwegian, Algerian, Azerbaijani pipeline imports compensate for Russian supply shortfall.

Inflation, Falling Exports Headwinds

Central Bank Governor Elvira Nabiullina at a press conference following the decision Friday said the ruble rate was closely linked to rising domestic demand which is a key inflation driver. This demand is increasing imports, while exports are continuing to fall, she said.

The hope for Russia and Putin is higher oil prices, easing domestic demand for foreign currency to pay for imports and upcoming month-end tax payments by exporters should offer support. Crude oil is Russia’s main export. Recent deals by India, who replaced China as the biggest buyer of Russian oil have been in the rupee and yuan, not the ruble.

A crude price cap (US$60) is on Russian oil exports, it briefly traded above it just last week. Since the cap, if not before Russian exports have been redirected to India and China in particular. Russian crude exports into India rose by 260kbd m/m in December to a record 1.2mbd.

OPEC+ has been aggressive in trying to manipulate oil prices higher by cutting production, the Kingdom of Saudi Arabia has taken the bulk of the cuts. Russia did cut 500kbpd at the last move. However, oil has struggled to rise materially since as we have seen America increase production and China’s economy not recovering as Putin and Xi would have hoped. The net result is Russia and KSA have lost market share to the USA and Norway among others. This all affects the ruble and exports.

Russia’s declaration of war on Ukraine has ravaged both countries finances and people with severe consequences for both countries the result of Russian President’s Putin’s actions. The degree to which Russia’s substantial currency reserves are able to mitigate disruption stemming from sanctions and the lengthy conflict are all part of the equation.

Prior to the invasion Russia had been shoring up its finances with Russia’s central bank adding billions to its banking sector with billions in additional foreign exchange and Ruble liquidity. Putin’s government has pledged full-scale support to sanctions-hit companies, however that was all with the expectation of a quick sharp victory in Ukraine.

Source: Reuters, KnovaWave, TC

From The TradersCommunity US Research Desk