A high geopolitical risk causes Russian ruble to drop
No new known macroeconomic factors could cause the current ruble devaluation. They say sanctions, some say a drop in imports
RUIMP
, others drop in exports
RUEXP
, brain drain, discounts on Russian oil, etc. Some blame the Prigozhin mutiny, but it doesn't change economic or political perspectives of Russia.
In my opinion, all these factors are in the price. The events, except the contained mutiny, haven't appeared suddenly. The situation has been evolving since previous February. All mentioned factors were discussed and evaluated a hundred times by pundits, exporters, importers, traders, and others. I agree that Russian international trade is in bad shape, but not in the worst. Russian current account
RUCA
is still positive. It continues its drop from the historical highs reached last year to the depressed level of 2015. It is not a catastrophe compared with peers, having a worse current account and weaker national currencies, though are not sanctioned.
You are reading a thankless type of forecast. I can't prove it with macro, but the determined bullish trend hints foreign currency buyers are aggressive because something forces them to sell rubles.
I believe the current drop in the Russian ruble is caused by an anticipated huge geopolitical event that may have far-reaching consequences for Russia, like 24 February 2022. Before that date the ruble was oversold. Russia had a strong macro (robust current account on the back of high petroleum and metal prices.) During those three months, only newspapers disturbed with publications Russian would attack. It could partly exert pressure on ruble, but because the attack wasn't started, it became the boy who cried wolf.
I can't prove it, but I suppose, that only a few people close to Putin could know what would happen and sell rubles and open short positions causing ruble fatigue before the war.
Last week's ruble devaluation reminiscent me of the oversold ruble in February 2022. I hypothesize that people close to the Russian head are fearing some event in the nearest future. Those people, let's call them oligarchs, could sell rubles now or open shorts to hedge if the event happens. From the macroeconomic view, it is pure capital flight. The fear may be related to a Zaporizhzhia nuclear power plant disaster and the West prospective actions.
If something extraordinary happens, I won't be surprised if USD spikes to the previous high of 150 in several weeks (to the star of the Kremlin tower pattern drawn in spring 2022).
If nothing occurs during the next 2-4 weeks, I expect ruble sellers to cool off and ruble retreat to 85.
RUIMP
, others drop in exports
RUEXP
, brain drain, discounts on Russian oil, etc. Some blame the Prigozhin mutiny, but it doesn't change economic or political perspectives of Russia. In my opinion, all these factors are in the price. The events, except the contained mutiny, haven't appeared suddenly. The situation has been evolving since previous February. All mentioned factors were discussed and evaluated a hundred times by pundits, exporters, importers, traders, and others. I agree that Russian international trade is in bad shape, but not in the worst. Russian current account
RUCA
is still positive. It continues its drop from the historical highs reached last year to the depressed level of 2015. It is not a catastrophe compared with peers, having a worse current account and weaker national currencies, though are not sanctioned. You are reading a thankless type of forecast. I can't prove it with macro, but the determined bullish trend hints foreign currency buyers are aggressive because something forces them to sell rubles.
I believe the current drop in the Russian ruble is caused by an anticipated huge geopolitical event that may have far-reaching consequences for Russia, like 24 February 2022. Before that date the ruble was oversold. Russia had a strong macro (robust current account on the back of high petroleum and metal prices.) During those three months, only newspapers disturbed with publications Russian would attack. It could partly exert pressure on ruble, but because the attack wasn't started, it became the boy who cried wolf.
I can't prove it, but I suppose, that only a few people close to Putin could know what would happen and sell rubles and open short positions causing ruble fatigue before the war.
Last week's ruble devaluation reminiscent me of the oversold ruble in February 2022. I hypothesize that people close to the Russian head are fearing some event in the nearest future. Those people, let's call them oligarchs, could sell rubles now or open shorts to hedge if the event happens. From the macroeconomic view, it is pure capital flight. The fear may be related to a Zaporizhzhia nuclear power plant disaster and the West prospective actions.
If something extraordinary happens, I won't be surprised if USD spikes to the previous high of 150 in several weeks (to the star of the Kremlin tower pattern drawn in spring 2022).
If nothing occurs during the next 2-4 weeks, I expect ruble sellers to cool off and ruble retreat to 85.
Comment:
Friday's decisions of the Bank of Russia signaled that the monetary authorities are not happy with ruble depreciation. It has hampered the 4% inflation target. The Russian consumer's basket is moderately import dependent and ruble's fatigue has increased CPI, so the Bank raised its rate by 100 bp to 8.5%, hinting that future hikes are possible. Additionally, the central bank informed us, since next month it is going to increase sales of yuan, that it holds in its reserves, by RUB 2.3 bln. The FX operations will mirror the National Wealth Fund investments. Finally, the Bank added it increased the neutral rate estimation from 5-6% to 5.5% -6.5%.
Comment:
There is a need to draw preliminary conclusions before the next month is started.
About a month ago Russian central bank authorities claimed that the drop of ruble was not a peril to the financial system and inflation growth rate, explaining that its fluctuations happened due to shrinkage of the current account surplus. Three weeks later it increased its rate by an unexpected 100 b.p. (consensus was 50 b.p.) and elevated its inflation and GDP growth rates for 2023. Economic growth is driven by 1) enormous budgetary spending started last year and reinforced in Q1 2023 and
2) high money supply growth at rates between 20-25% YoY that has sustained for almost a year
Levels not seen in the last 10 years.
Additionally, the bank hinted that new rate hikes could happen in the next months.
The actions and claims contradict its previous policy. They can be partly explained that the bank underestimated the effects of ruble depreciation on consumers' inflation expectations
and that high money supply growth indicated the overheating of the Russian economy.
But I believe after February 2022 the board of directors of the central bank are experienced enough to guess what could happen next. They may take into account, amended Russian mobilization laws that now connect summons to the governmental digital platform keeping everything in an electronic register. (BTW, is it a coincidence that the Russian CBDC legislation is to take effect on August 1, 2023? The digital ruble is also connected with the same governmental platform). The central bankers could anticipate that soon it may be activated. Also, I suppose they may anticipate or know that regular tests of disconnection from the overseas Internet could be a sign that the Russian government is preparing for something harmful to businesses and the population. If it is implemented in parallel with the new mobilization legislation and the Russian Internet becomes intranet, it would cause a certain ruble reaction and a new wave of capital outflow help to build militarized Russian economy. To battle the disguise consequences for ruble, inflation, and economy the bank started monetary tigheting in advance.
About a month ago Russian central bank authorities claimed that the drop of ruble was not a peril to the financial system and inflation growth rate, explaining that its fluctuations happened due to shrinkage of the current account surplus. Three weeks later it increased its rate by an unexpected 100 b.p. (consensus was 50 b.p.) and elevated its inflation and GDP growth rates for 2023. Economic growth is driven by 1) enormous budgetary spending started last year and reinforced in Q1 2023 and
2) high money supply growth at rates between 20-25% YoY that has sustained for almost a year
Additionally, the bank hinted that new rate hikes could happen in the next months.
The actions and claims contradict its previous policy. They can be partly explained that the bank underestimated the effects of ruble depreciation on consumers' inflation expectations
and that high money supply growth indicated the overheating of the Russian economy.
But I believe after February 2022 the board of directors of the central bank are experienced enough to guess what could happen next. They may take into account, amended Russian mobilization laws that now connect summons to the governmental digital platform keeping everything in an electronic register. (BTW, is it a coincidence that the Russian CBDC legislation is to take effect on August 1, 2023? The digital ruble is also connected with the same governmental platform). The central bankers could anticipate that soon it may be activated. Also, I suppose they may anticipate or know that regular tests of disconnection from the overseas Internet could be a sign that the Russian government is preparing for something harmful to businesses and the population. If it is implemented in parallel with the new mobilization legislation and the Russian Internet becomes intranet, it would cause a certain ruble reaction and a new wave of capital outflow help to build militarized Russian economy. To battle the disguise consequences for ruble, inflation, and economy the bank started monetary tigheting in advance.
Comment:
Quick update. The central bank of Russia raised the rate
yesterday at its emergency meeting. It partly cooled the ardor of ruble sellers. Today, Russian media informed the central bank and Russian economic and energy ministries asked Russian exporterts to sell foreign revenue actively. If the unofficial agreements do not help, the authorities will reintroduce mandatory foreign revenue sales, increasing the level up to 90%.
This measure likely would not let USD reach the 'Kremlin tower' highs, marked in March 2022, this year.
Heavy revenue sales could partly help the ruble to return to the lost position, mimicking the March-April 2022 move. I will not wonder if USDRUB will be about 84 to October. However, all other macroeconomic data is against strong ruble correction.
This measure likely would not let USD reach the 'Kremlin tower' highs, marked in March 2022, this year.
* The first has a clear macroeconomic sense. Possible withdrawal from the Black Sea Grain deal. The extension is expected to happen on July 18. Russia values the deal. Unofficially, the deal helped to soften the tightness of anti-Russian sanctions on agriculture and fertilizers supporting stable export levels of the commodities, vital foreign currency influx, and essential correspondent agreements with foreign banks. Additionally, market participants spend the coming revenues on imports, including agricultural and chemical-related products, such as seeds, vet vaccines and pills, and equipment.
If Russia self-withdraws from the deal, the risk of new sanctions hampering Russian exports will increase. That leads to the change in macroeconomic balance, stimulating shrinkage of the dropping current account surplus. Additionally, it may cause new restrictions on the rest not-sanctioned Russian banks.
*The second possible driver is Russian regular tests of disconnection from the overseas Internet, leaving only internal connections. This week it again temporarily restricts access to the international Internet. The targets and consequences of it are blurred for analysis. But some may be afraid of curtaining opportunities of making money in Russia prompting market players to sustain capital flight while a few money transfer channels that apply Internet connections are on.
*The last two factors have one in common, access to the international payment system. Waiting for possible sanctions after those factors is an opaque divination. However, the Raiffeisen Bank's planning leave could bring more acute and clear issues. For the last 1.5 years, the bank has played an intermediary role of one of a few pillars for outbound payments abroad. Quitting Raiffeisen Bank (However, rumors say it is on hold now.) could drive affluent Russians to transfer money from Russia, lowering the ruble price now.
*The last factor can be simple and more likely than all others summing up mentioned in the initial post and this comment. For more than 20 years of sudden actions and decisions made by the Kremlin that damaged politics and the economy, it has lost trust and respect among even the most loyal rich audience. Since the previous year the group has continued and possibly gained outflow of capital in the last period sinking the ruble to lower and lower levels.