February 11, 2017    8 minute read

The Ruble Recovery: The Sky Is the Limit or Troubles Ahead?

Is Winter Coming?    February 11, 2017    8 minute read

The Ruble Recovery: The Sky Is the Limit or Troubles Ahead?


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The past three years have marked an expensive time for those holding the ruble. A collapse in commodity prices and imposed sanctions from foreign powers have sent the Russian currency spiralling to record lows. By February 2016, its value had fallen by 56% against the dollar to reach its lowest ever level, earning the unwanted award for the worst performing currency among the emerging economies. The impact of this depreciation was immediately felt in the purses of Russian citizens, as pressure on the currency drove up the cost of imports, resulting in a consumer price increase of 12.9% in 2015.

Since 2008, prices for high street goods have doubled, with a staggering one-quarter of this change coming during the years of 2014 and 2015. Food prices were the primary driver of this inflation, increasing 20.8% per annum, followed by consumer electronics 26%, pharmaceuticals 23% and the costs of foreign travel 37%.

20.8% was the annual rise in food prices

Recently, however, the mood surrounding the ruble has changed. Recovering oil prices and improved sentiment surrounding US-Russian relations have helped alleviate some pressure. As a result, many people now expect a noticeable recovery by the end of the year. Just how much will depend upon the following factors:

Price of Oil

Russia is the world’s largest energy exporter, and its currency is most sensitive to fluctuations in the price of crude oil.


(The correlation between WTI Crude oil price (Orange) and the Russian Ruble spot price (Blue); Source: Bloomberg)

The above graph highlights the sensitivity of the currency to fluctuations in oil price. In just eighteen months from June 2014, the cost of a barrel of crude decreased from $107.26 to $29.42. In the same period of time, the ruble suffered its sharpest depreciation in value, falling from 34.4 per dollar to 78.7.

Energy accounts for 70% of total Russian exports, and the money brought in from this accounts for approximately 50% of the nation’s federal budget intake, with oil & gas directly responsible for 30% of total GDP. For this reason, it is not hard to see how predicting the price of oil will give a good estimate for the future value of the ruble.

Predicting the long-term price movement of such a volatile commodity is a very challenging task, although already in the past year one has witnessed a recovery.  WTI Crude is back up to $53.86 per barrel at the time of writing, and many analysts predict continued upwards movement into the range of $55.18 by the end of 2018, reaching $70 per barrel by 2020 according to the Energy Information Administration. Many oil executives hold a more optimistic view, predicting growth of up to $90-$100 per barrel in the same period.

On the other hand, according to the World Oil Outlook 2016, the average ORB price will increase to $65 per barrel in nominal terms by 2021 among OPEC members, steadily climbing to $92 in real terms ($155 nominal) by 2040. One major concern is the production levels amongst non-OPEC members, which are expected to reverse direction and continue to increase by 2018. This may threaten the price recovery.

According to Russian finance minister Anton Siluanov, today’s current price level would be enough. The current budget has priced in oil at $50 per barrel, with a price of $82 per barrel needed to balance the budget. Eyes will continue to be on OPEC’s ability to reach an agreement over production supply, which has often provoked the largest market response.

Sanctions on Russia

Trump’s election victory was widely considered a lifesaver for Russia, as many analysts now anticipate an improvement in relations with the US and the removal of sanctions in place since March 2014. The day after the US election in November 2016, Russian stocks rallied the most amongst the emerging markets, with the Micex advancing 2.2% on the day as Russian 10yr bond yields climbed five basis points. Of the 50 companies in the index, 46 advanced, with the most notable movements coming from Gazprom and Sberbank PJSC, two national companies with strong ties to the Kremlin.

The ruble had already shown healthy gains of 2% in direct response to the US Treasury Department’s Office of Foreign Assets Control amendment of a sanction to “authorise certain transactions” with Russia’s Federal Security Service, and so how much upwards momentum could be generated if every sanction is cleared?

Vladimir Miklashevsky, emerging market senior economist and strategist at Danske Bank in Helsinki, has hypothesised that should sanctions be lifted then the ruble could strengthen almost 25% to 48 against the dollar by the end of the year. Bloomberg has predicted a more conservative estimate of around a 5% to 10% advancement, following a survey of senior economists, while Societe Generale has predicted a possible dip to under 50 rubles per dollar, equivalent to a movement of around 16% from today’s value. The lifting of sanctions will accelerate capital inflows and support the currency.

Lifting these sanctions will be easier said than done, however. Last week, a group of bipartisan senators led by Republican Lindsey Graham published legislation named the ‘Russia Sanctions Review Act’, which would require Trump to notify Congress before any financial sanctions are lifted.

If passed, lawmakers would have 120 days to pass a joint resolution of disapproval preventing the US president from lifting the sanctions. Trump would also be unable to act while Congress was reviewing the proposal.

Assuming this legislation clears the Foreign Relations panel, it is likely to gather strong support from both sides of the house. Certainly, if sanctions are to be lifted, it will be a gradual process. Do not expect the ruble to change overnight as a result of this factor.

Central Bank Policy

Russia’s central bank has earned significant credibility over the past year for its ability to bring down extortionate inflation levels in a short period of time, through a hawkish inflation targeting strategy, which has also helped alleviate a lot of pressure from the currency. In November 2014, the CBR announced plans to allow the ruble to float freely on the market, without direct interference. Letting the ruble float was a bold strategy, protecting the bank’s gold and foreign exchange reserves, which could have otherwise been used to directly defend the currency.

On the evening of December 15th, 2014, the Russian central bank announced it would hike the key interest rate by 650 basis points to 17%. Once again, this sharp jump came with risks, as financial institutions were threatened with heavy losses as a result of their clients being unable to make repayments at the new rate. The outcome has been a reduction of inflation by 7.9% in two years, and while interest rates remain above the target range at 10%, the central bank remains on course for further monetary easing.

The bank also pledged interventions to assist the currency if its depreciation resulted in financial instability, as well as halting the purchase of foreign currency in a bid to boost reserves. While central bank Chief Elvira Nabiullina has been active, she has also faced criticism for slow intervention following the ruble’s sharp drop. Holding steadfast against senior corporate chiefs who demanded stimulus has been an achievement, however, as further liquidity would have only resulted in further depreciation.

While so far the central bank has played an important role in the recent strengthening of the currency, in the future they may intervene to stop the ruble from becoming too strong. Last week, the CBR resumed its FX purchases designed to replenish the ‘rainy day’ Reserve Fund. Assuming oil remains above $40 per barrel, then this programme should continue indefinitely.

This policy, based on previous results, is seen by many as an attempt at depreciating the currency. The introduction of a mechanism that prevents the government from spending surplus revenue above a pre-set oil price, in order to mitigate the impact of price volatility, should prevent any major spike in the exchange rate. It is likely that if the ruble appreciates to levels similar to the possible outcomes already mentioned in this article, then the central bank will act further to put a lid on this advance.

Where Will the Ruble Go from Here?

The above three factors are all vital in ensuring full recovery of the ruble. While it is unlikely that the currency returns to strength enjoyed before the beginning of the commodity slump in 2014, the likelihood of it being this year’s top performer is very high. Without direct intervention and barring further political turmoil, the ruble will break through the 50 dollar mark and follow oil price growth through to 2021.

While many Russians are searching for a cheaper international holiday, the Kremlin will be cautious as to not let strong currency intervene with the recovery from the worst recession in two decades.

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