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Natalia Orlova
Natalia Orlova
Chief Economist @ Alfa
21 December 2020
Alfa
Published by Alfa
Natalia Orlova
Natalia Orlova
Chief Economist
Alfa
21 December 2020
Published by Alfa
Macro Analysis / Russia

Russian ruble exchange rate: Cautious view on Q1 21

Natalia Orlova
Natalia Orlova
Chief Economist @ Alfa
21 December 2020
  • Recent ruble appreciated driven by oil price recovery, but persisting sanction risk premium is a negative sign
  • Central bank forex sales to stop, the MinFin forex purchases to resume
  • Sanctions risk is a watch factor for Q1 21
Russian ruble exchange rate: Cautious view on Q1 21
Natalia Orlova
Natalia Orlova
Chief Economist @ Alfa
21 December 2020
Alfa
Published by Alfa
Natalia Orlova
Natalia Orlova
Chief Economist
Alfa
21 December 2020
Published by Alfa

Recent ruble appreciated driven by oil price recovery, but persisting sanction risk premium is a negative sign: The ruble was under strong pressure in August-October 2020 as the geopolitical risk-premium was on the rise ahead of US elections. Protests in Belarus, Navalny’s poisoning, military tensions in Nagorny Karabakh – all these factors have stressed the market right before the 3 November US elections, but are barely mentioned by market participants since that moment. Since the end of October the ruble is up 8%, doing relatively well versus other EM currencies. The recovery in oil prices helped a lot : as of the beginning of November oil traded at $40/bbl implying a ruble fair value of RUB72/$ (a RUB6-8/$ risk premium), but now oil is trading above $50/bbl implying a fair ruble rate at RUB67/$ (the sanction risk premium being relatively unchanged). In other words, while the market seems to be oblivious to sanctions risks, the sanction-related risks are still priced in. Some experts see the existence of a risk premium as a reason to make a call for a stronger ruble; however, we believe it reflects a market nervousness in place.

Central bank FX sales to stop, the MinFin forex purchases to resume: An important reason to keep a cautious view on the ruble is that in recent months the market was still benefiting from the support of the central bank. In December, the Russian monetary authorities continued to sell around $80mn a day, or $1.8bn a month, a sale which executed to clean the CBR balance sheet from the remaining obligation to and from the Finance Ministry. But these operations would last only until this year end and the CBR is expected to step away from the market in January. At the same time, the recovery in oil prices could soon allow the Finance Ministry to resume currency purchase under the budget rule operations. The budget rule oil prices, set at $42/bbl in 2020, will be temporarily adjusted to a higher level in order to put the budget policy in line with the economic crisis reality. The OPEC+ deal set a 10% y/y decline in production, thus de facto moved the budget rule oil price up to $47/bbl, which is the budget rule prices adjusted to the production volumes. We thus do not exclude that in January-February the Finance Ministry could resume its forex purchase. In this case the amount of purchase may not be high, up to $1bn per month given where oil prices are now, however the change of the authorities position on the market could neutralise the positive stance on the ruble in the short-run.

Sanctions risk is a watch factor for 1Q21: The 1Q21 period does not look like an easy period from an external front point of view. The first point is the sanction issue. Once US President-elect Biden take office on 20 January, the market would expect him to clarify his view, and even steps to be taken, towards Russia. The fact that the sanction premium at the moment, without any clear threat from the US side, is as high as RUB6-8/$ suggests that in case of more concrete steps from US side, this premium could increase substantially. Sanctions risk could easily neutralise an effect of the global risk-on for the ruble. The second point is that global markets were very optimistic recently ignoring any negative news; however, if on 5 January Republicans lose their Senate majority in the Georgia run-off, concerns over possible tax hikes in US could reverse market sentiment. All in all, we consider that the global landscape may not be friendly for the ruble in 1Q21.

Oil prices more likely to stay around $50/bbl then go higher: The ruble dynamic is expected to remain dependent on oil price trends. The OPEC+ deal may help to keep oil in $50-60/bbl in the short run, however the recovery in global demand is likely to initiate a discussion over smaller production cuts. The scenario that oil prices will be anchored around $50/bbl through 2021 seems to be a more plausible scenario of their continuing recovery. Another point is that demand may not recover as fast as expected by the market – in particular, while the US and UK were dealing relatively well with the second wave of the pandemic, European countries appear to be struggling. As the recent news suggest, the speed of the back to normal process could come slower than expected by investors. Put short, the positive news seems to be priced in, while any delay to back to normal is out of the market scope at the moment.

Return of $30bn FX demand linked to resumption of foreign travel: Finally, as we stressed in our previous publications, the closed border helped Russia to reduce foreign travelling and thus reduce the demand for the foreign currency of the range of $30bn in 2020. Once international travel resumes, this would add pressure on the ruble. The full return of the $30bn demand to the market will be equivalent to a $10/bbl decline in oil prices; this return will be gradual but should be kept in mind for the 2021 landscape. We thus stay with our view that for 2021 the ruble exchange rate should stay in the range of RUB70-75/$, once the risky 1Q21 is over.

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