Russian Rubble?

It may be twenty five years since perestroika and glasnost lifted the Russian rouble from rubble but the RUB has still had to rely on hard intervention at times. This is changing with the Central Bank of Russia (CBR) and their new governess Elvira Nabiullina – the first female to head a G8 Central Bank.

The Kremlin's steadier foundations

Central Bank of Russia’s recent monetary policy decision to move towards a free floating exchange rate, liberalization of the interest rate market as well as inflation targeting bode well for the RUB. Governess Nabiullina aims to promote economic growth whilst reducing inflation to around 3-4%. Her appointment should be seen as a step towards easing of Russia’s monetary policy. Additionally, she is Putin’s strong ally and therefore has the power base to push through easing policies. Nabiullina previously served as President Putin’s economic advisor as well as Minister of Economic Development and Trade. She was one of only six senior government officials to follow Putin back from government to the Kremlin administration after his 2012 election victory. Following her appointment, the CBR may cut interest rates in the coming months as growth has slowed to around 2.1% year-on-year from 3% in Q3 2012.

Since July 2012, the RUB has traded close to its midpoint of 35.15 against a basket of currencies. Global factors have been more essential determinants for the RUB than domestic data and events. One of the major global factors is the oil price as Russia is the largest exporter of natural gas, the price of which is linked to oil. Nervousness will remain high due to the Cyprus mini-crisis. However the RUB has moved bearishly over the last few months suggesting that these risks are already priced in. Until the end of 2013, other factors will be important for the RUB:

·         Russia has comparatively strong economic growth, which is RUB supportive;

·         However its strong domestic demand has attracted increased imports which means its current account surplus is on a downward trend. Yet there is still likely to be a surplus (RUB neutral);

RUB Movements

·         Capital outflows remain strong but are likely to moderate as political risks associated with last year’s elections dissipate and global growth improves (RUB supportive);

·         FX reserves are relatively stable at USD$532 billion;

·         Net FDI flow will likely change from negative to positive as investors seek to invest more money in Russia, in particular due to the new access to the Russian government bond market as well as the relative attractiveness of equity in Russian companies. The MICEX tracks the performance of the 30 largest and most liquid Russian companies from 10 main economy sectors that are listed on the Moscow Stock Exchange – it has grown by 1500 points from 1998 to 1586 (RUB positive);

·         Carry trades involving RUB are likely to be in vogue due to Russia’s short-term interest rates of 8.25% being one of the highest among large countries (RUB positive).

Overall I expect the RUB to gain about 5% by the end of 2013 from around 35 to 33.5 against the basket of currencies. In addition, it is important to bear in mind the strength and determinants of Russia’s economy. The Russian economy is the fifth largest in the world and is commodity-driven. Russia is the world’s largest producer of oil (12% of world output), natural gas (18%), and nickel (20%). The energy sector contributes 20-25% of GDP, 65% of total exports and 30% of government budget revenue. In Russia, services are the biggest sector of the economy and account for 58% of GDP. Within services the most important segments are wholesale and retail trade, repair of motor vehicles and motorcycles, and personal and household goods, public administration, health and education, real estate, transport and storage. Industry contributes 40% of total output – mining (11% of GDP), manufacturing (13%), and construction (4%). Agriculture accounts for the remaining 2%. During the past decade, poverty and unemployment (5.8% in February 2013) have steadily declined along with expansion of the middle class. Similarly, from 1991 until 2013, the Russian inflation rate averaged 155%, yet it is now currently 7.2%. Russian government debt to GDP was also 9.6% in 2012, a marked decrease from a high of 99% in December 1999. The easing of government control on the economy under Nabiullina along with the Russian economy’s strong fundamentals are positive for the RUB. Therefore, the Russian rouble is far from rubble.