After drifting inconspicuously sideways for the past few months the Russian rouble came under appreciable selling pressure at the beginning of August. This uncertainty surrounding the Russian currency is mainly due to the coincidence in time of two events: The USA’s tougher sanctions policy and the massive depreciation of the Turkish lira.
In our view, the rouble would be well advised to get prepared for ongoing headwind in the next few months. This assessment is primarily prompted by the US Congressional elections scheduled for the beginning of November. We assume that the USA will continue to follow a tough line on sanctions against Russia in the run up to the elections. Besides the uncertainty about what further penalties the Russian economy and its financial markets could still be confronted with, the already ailing rouble is also likely to have a hard time in the autumn months due to the lira’s continuing problems and the hugely soured EM sentiment that is associated with this.
Although the rouble is likely to have a fairly hard time for the rest of the year, nevertheless in the medium term we do not expect any sell-off of the Russian currency. Our assessment is based on the assumption that the current lira crisis will not turn into a sustained emerging markets crisis. On the other hand, we assume that the USA will not tighten its sanctions hugely in the wake of the Congressional elections. Although a sustained escalation of US sanctions against Russia remains a risk factor for the rouble, at the end of the day the USA is also unlikely to have any interest in a permanent deterioration in US-Russian relations and will, therefore, ultimately be interested in finding a constructive solution. In this environment the market should then also be fairly willing to reconsider the rouble’s plus points. These include what we assess as continued solid oil price trend, Russia’s key fiscal figures, which are advantageous compared to other EM countries, and the country’s solid external position. Also worthy of mention in this context is the Russian central bank, which the markets regards as credible, and the comparatively high real interest rate level in Russia.