Russia’s ruble’s selloff has picked up speed falling to its weakest level in over a year, through 100 against the US dollar for the first time since the week after Russia’s invasion of Ukraine. Less than a month ago 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% which surprised analysts polled by Reuters, with a 50-basis-point hike the consensus.
The latest move comes after the CBR announced last week it would stop planned foreign-currency purchases as part of Russia’s rainy day National Wealth Fund.
However, the issue goes deeper, costs are rising, and the Ruble is losing value at a faster rate on the black market, where many Russians are using dollar. The ruble has been hit by risk-off sentiment hitting Russian assets.
We have had the Wagner coup attempt, Russia bombing Ukraine ports days after not renewing the Black Sea grain deal. From the grains prices have actually fallen. While oil prices have risen, so has the US dollar. The oil cap on Russian oil also limits income there.
Another is oil quality. Pakistan came out on the weekend and said they will not buy Russian oil because of it’s poor quality and burn rate in their refineries.
We than have the BRIC story where apparently Russia and China will have you believe the world wants out of the dollar and into BRIC currencies. However, there is no single currency amongst them. The large members are China, Brazil and China. China’s yuan has also been falling as has the Chinese economy. India paid for Russian oil for example and then Russia couldn’t find a suitable way of converting the rupees.
So far this year, the ruble has lost around 30% of its value against the dollar. It is the territory of other wrecked currencies such as the Turkish lira, Nigerian naira and Argentine peso. All of these have inflation on economies relying on imports, however they are as not yet ostracized by the world and burdened by sanctions. This brings the likelihood that the Ruble is actually being falsely held too high, much like the Turkish Lira was. We know how that worked out.
There is the pressure of western sanctions and the repurposing of the Russian economy toward supplying the war in Ukraine.
The ruble’s sharp fall is opening up cracks among senior Russian officials over a response. In a world where you can’t ‘talk about the war’ the central bank is copping the blame.
“The main source of ruble depreciation and inflation acceleration is loose monetary policy,” Maxim Oreshkin, President Vladimir Putin’s top economic adviser, wrote in comments carried by Russian state newswire TASS Monday. “It is in the interests of the Russian economy to have a strong ruble,” he wrote.
Russian Sen. Andrey Klishas in a post on Telegram; “it’s important for the Central Bank of Russia to understand that until now, unfortunately, the dollar exchange rate is not only an economic indicator, the exchange rate has a significant impact on the social rights of our citizens.”
It has been a volatile couple of 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.
With Putin and Co’s rants against the ‘Toxic US dollar’ trading in the dollar-ruble pair has fallen as with the Chinese yuan up to a record 44% of currency trading volumes on the Moscow Exchange in July. The problem is the against the yuan, the ruble is off 22% this year. Factor in the yuan is also down 4.66% against the US dollar after sliding in 2022 and at levels forcing the politburo to try and intervene and stop the fall.
This story has been one of constant knock-on effects, unintended consequences seem to be something Putin chooses to deny. Is the ruble the new Lira?
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 at the last rate meeting 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