Rouble stays unrattled in the Ukraine-Russia conflict

As the year 2018 gradually comes to an end, it is high time for the rouble to take stock. This is likely to paint a patchy picture for the Russian currency as it took quite a beating at times in the course of the year at the hands of the euro as well as of the US dollar. It had some reefs to circumnavigate – including the emerging markets crisis and the Fed’s more restrictive monetary policy stance. Primarily, however, in the past few months it has been the sanctions imposed on Russia by the USA that have put the country’s currency on the defensive. The first round of sanctions came at the beginning of April as a response to the alleged Russian interference in the US presidential election campaign. Further sanctions followed in August/September when the USA reacted to presumed Russian participation in the poison gas attack on the ex-agent Skripal and his daughter as well as to generally “malicious activities” by Russia. Surprisingly, the rising oil price, which is traditionally a supportive factor for the Russian currency, provided no notable support in these times.

Indeed, in both cases the rouble depreciated at times against the euro as well as the greenback by around 10%. But it did not suffer any lasting losses. At the moment, the renewed escalation of the Ukraine-Russia conflict is also showing that it is not so easy to spook the rouble. Admittedly, following the incident in the Kerch Strait and the subsequent imposition of martial law in the Ukraine, the Russian currency initially reacted by depreciating by around 2% against the euro and the dollar. But this downside movement – in light of the danger associated with this escalation – looks extremely small especially as the latest geopolitical developments are likely to stand in the way not only of an early easing of the existing US sanctions against Russia but could even lead to further sanctions from the entire West in the event of a further escalation of the Crimean crisis.

The fact that the rouble has ultimately ridden out the US sanctions in the spring and autumn of this year with manageable losses and that it is not seriously spooked by the worrying developments in the Crimean crisis at the moment is probably mainly due to the monetary policy of its monetary watchdogs. The latter enjoy considerable confidence among market players and in the course of the year have already made it clear on several occasions that if the worst comes to the worst they are prepared to take the monetary policy steps needed to stabilize the rouble without hesitation. For example, in April when the first wave of US sanctions shook the rouble appreciably, the Russian central bank (CBR) brought to an end the process of monetary-policy normalisation to which it attached so much importance and waived forthwith further key rate cuts. In September, when the head wind for the rouble had increased massively again, the CBR surprised the market with a key rate hike of 25 basis points as well as with a hawkish tone that did not rule out further tightenings of the monetary-policy reins if need be.

In our assessment the rouble will probably continue to be able to count on its monetary watchdogs. As regards the CBR’s next monetary policy meeting on 14 December, the market currently expects an unchanged key rate level of 7.50%. But if the Ukraine-Russia conflict escalates further and rattles the rouble appreciably, then we believe the CBR would take action again and raise key rates further regardless of its wish for monetary policy normalisation and despite Russia’s moderate growth. So ultimately, they would probably shield the rouble from the worst again.


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