Rapidly escalating trade war tensions between US and China and concerns on a potential second wave of covid-19 continue to linger. President Putin faces many challenges domestically, and his policies could ultimately impact the direction on the ruble .
Trouble at home
Russia is struggling to contain covid-19 at home and is on track to remain top 3 in the number of confirmed cases. While the death toll of 3,388 is significantly lower than most EU countries, I would take this figure with a grain of salt. In fact, the same view can be applied across all countries as every government classifies the deceased in a different way.
Nevertheless, over the past month, President Putin announced the gradual easing of restrictions, with local governors given the ability to decide on implementations and timelines. This is slightly uncommon given how tight Putin has run his ship, but also a strategic move on his part given that he could shift the blame on local governors should there be a rise in infections. It's noteworthy that President Putin's approval rating is already at its lowest since his inauguration in 1999. Given that Russia is heading towards its most serious recession since 1998, his base of support could decline further in the next several months. Putin's administration can take all the credit if easing plans bode well for the economy.
China - Catch 22
Russia has built strong ties with China over the past decade amid deteriorating relationships with the West. President Putin cannot afford to take the same stance as US President Trump on blaming China's alleged mishandling of covid-19 given China is its biggest strategic partner and hedge against the US and EU.
What can Russia do?
Putin could either divert attention by increasing geopolitical tensions (vis-a-vis Crimea type of move). However, such a bold strategy could do more harm than good. The only way out seems to be shifting focus towards structural and regulatory reforms, and reducing corruption. In fact, there is more incentive to diversify its economy now given the sharp drop in oil prices. However, Putin's administration has yet to deploy massive fiscal support (as seen by other countries). I suspect this will come towards the end of the year; the reluctance may have to do with timing of the referendum (his political plan is to remain as Russia's president potentially until 2036).
Rate cut implications
Last month, the of Russia ( CBR ) lowered its rate by 50 bps to 5.50% in line with market expectations, while signaling for more cuts to come to reduce recessionary risks. The pair retreated in response to CBR's dovishness and rate cut. At this stage, I don't see rate cuts as a big deal given every is easing, so long as the CBR's word remains credible. If the latter does not hold, currency interventions may be required to stop RUB depreciation.
I believe we are in favor of a move higher in the pair as we breakout from a pattern. There are plenty of shorter time frame on the pair - that's not the ultimate focus here, but rather to take a directional view based on .
Risks / opportunities
On the contrary, RUB could be one of the most attractive EM plays if Putin's administration can weather the storm and implement comprehensive economic reforms. Currently, I am not of that view, particularly on the backdrop of covid-19, while any heightened tensions between the US and China is a negative for RUB.
As such, targeting near April highs of 77.174 as an initial target with stop loss set (at 69.946) under the of around 72.700.
While there maybe a chance that the above plays out given that Russia is caught in an economic plunge with state budgets at risk from lower oil prices (despite recent recovery); crude below $42 p/b is still under state budget. However, looking at its BOP for 4m20 would suggest CBR is offsetting some of its predicament via fx intervention, coupled by recovery in portfolio flows of sov debt.
Current account surplus contraction in April was offset by the aforementioned, and thereby preventing short term RUB depreciation. A scope for appreciation may also be limited at this juncture from a $22bn backlog of expected fx purchases.
Agreed... in Australia I must say I have observed more food products coming from Russia...
Also everyday, there seems to be a pause in trading the US currency... is there a reason for this?