News & Analysis

The Russian ruble is one of the worst performers in the EM space this year, even as oil rebounded by almost 30% after its initial crash at the early stages of the pandemic.

Since June, the ruble saw the largest drop among EM currencies apart from the Turkish lira, plunging over 11% against the dollar and over 16% against the euro. This was a consequence of a domestic Covid-19 outbreak, a crash in oil prices and a general outflow in EM assets since the pandemic. Despite the plunge, the ruble remains one of the highest yielding EM currencies at the moment, as the Federal Reserve’s pledge to keep rates near zero for a while even when inflation lands above the 2% target means that the ruble could arguably still maintain its competitive edge even if the CBR decides to cut rates further.

Our USDRUB forecasts continue to envisage RUB weakness around the 75.00 level until year-end, before a general EM rally begins in 21H1 with USDRUB trading back to 68.00 by Q2-end.




The Central Bank of Russia embarked on its largest cut in five years in June and reduced interest rates by 100bp to 4.5% after having already cut its benchmark interest rate by 50 bp in April. The Bank has repeatedly suggested that it could further reduce rates as inflationary risks seemed low and the economy suffered a large hit from the pandemic, while the resulting crash in oil markets also weighs on economic activity. The ruble barely flinched after the CBR’s announcement and only slightly trimmed some of its earlier gains against the euro and the dollar, however, as the rate cuts were mostly priced in by markets and the interest rate spread between the US and Russia remained intact. Losses against the euro were slightly larger, but this may be due to broad EUR weakness in general. The euro remains a funding currency with negative rates and a QE programme intact, which is why the rate cuts most likely did not have a big impact on EURRUB. Deputy Central Bank Governor Alexei Zabotkin downplayed the effect of a weak ruble on the economy, and stated that the CBR could cut its key rate below 4% if that is needed to boost consumer inflation back to the 4% target. However, the Deputy’s wording may be perceived as a sign of holding rates at this week’s policy meeting, especially with Rosstat releasing its inflationary data for the first week of September highlighting CPI at 3%, thus reducing deflationary concerns. In addition, the Russian government recently announced a 3% increase in public sector salaries, which may bode well for inflation in the near future and increases chances of inflation reaching the 4% target at the end of the year. Markets will find out on Friday 18th what the CBR’s decision is, with expectations split between a 25bp cut and holding rates steady. Should the CBR refrain from cutting rates on Friday, markets are likely to continue bracing for a rate cut in the future.



Although there is more room for further easing by the Bank of Russia, the latest data suggests that the Russian economy will outperform the forecasts by the CBR, lessening the urgency of further easing. Headline inflation rose to 3.6% year-on-year in August, up from 3.4% in July, matching the forecasted median provided by Bloomberg. The acceleration in inflation was not a total surprise, but rather a correction after consumer stockpiling and supply-chain disruptions weighed on the latest inflation readings. Inflation is rising, but remains below target; the CBR’s July forecasts saw inflation rising to 3.7-4.2% by year-end.

Russia’s economy posted a smaller-than-expected plunge in Q2 GDP, with year-on-year final GDP contracting by 8.0% compared to the 9.5% contraction forecasted by Bloomberg.

Relative to more service-oriented economies in the west, Russia seems to have defied expectations in the face of the pandemic as it continues progress towards recovery.

Its reliance on mining, agriculture and public administration may explain the smaller than forecasted plunge in GDP, as these sectors were less impacted than the service sector. However, the reason why Russia’s economy was less impacted by the virus may also lie in the way Russia calculates its GDP numbers. Proxies are usually used to measure output, and these proxies may understate the actual disruption of the economy. Regardless, it remains a question how Russia reported a smaller contraction than most other major emerging markets and advanced economies, especially considering the country endured a nationwide lockdown from March to June and the oil market crash only added to the virus drag. Russia’s economy experiencing less of a shock may give the CBR reasons to hold rates and the government reasons to carry out smaller fiscal stimulus compared to that in the G10 space.


Russia’s Q2 GDP vs other emerging markets


Another possibility is that Russia experienced a lighter lockdown than recorded. Bloomberg’s daily activity tracker shows that Russia is has one of the highest activity indices and highest year-on-year GDP figures. In the graph, Russia’s index is set around the average, indicating that its daily activity tracker and GDP levels were not out of balance, suggesting falsification in its Q2 GDP reading from the use of proxies. Considering that Russia has been in lockdown throughout the entire period on the graph, however, a plausible explanation could be that the lockdown was light compared to other countries.


Bloomberg’s Activity tracker vs Gross Domestic Product in Q2

Source: Bloomberg


While a lighter lockdown may look good for current economic activity, bumps in the recovery road may be looming as the risk of increased infections remains elevated. Russia has seen a larger domestic outbreak than most other developed countries. The new rate of infections has somewhat accelerated in the past weeks, bringing the total number of cases over 1 million. The nation’s fatality rate, however, has remained low compared to other hard-hit countries, raising speculation that Russia may be underreporting figures. Although, this could be due to better health infrastructure relative to the CEEMEA region. Despite the nationwide lockdown from April through May, with some severe restrictions still in place at the moment, Russia was initially less effective in curbing the outbreak relative to other CEEMEA countries.  However, the countries that dealt better with the outbreak have seen an upsurge in cases since the beginning of August, while the case growth in Russia remained relatively stable in the past month. This bodes well for the economic recovery as localised lockdown measures are starting to be imposed as the fall and winter months close in.



The Russian ruble has not seen a rally like in other petrocurrencies such as the Canadian dollar or Norwegian krone. The Russian economy largely runs on oil, with 12% of global oil output coming from the nation, but Russia’s GDP levels do not reflect the almost 20% cut to crude oil production in May through July. One potential reason for the limited economic reaction to the oil slump is the large government surplus from the last fiscal year. With a large share of government revenue derived from oil sales, the drop in oil tends to have a larger impact on the fiscus and thus the economy and markets. However, after a bumper surplus was recorded last year due to a VAT tax hike from 18% to 20%, the impacts on government finances was dampened. As oil markets started to rebound in June, the ruble initially rallied along with it, but the gains did not last long, owing to expectations of a slower recovery in oil above the $40 mark.

Euro strength stemming from the EU recovery fund agreement and broad dollar weakness as the global economic outlook remains uncertain initially put a halt to the ruble’s rally, while arguably later on in August and September political headlines also had their fair share in pushing the ruble down. As a result, the ruble lagged behind in its recovery compared to the Canadian dollar and Norwegian krone.


Ruble failed to rebound along with oil as euro strength and domestic political risks loomed



Political risks have resurfaced in light of the poisoning of opposition leader Alexey Navalny. The confirmation that Navalny was poisoned by Novichok heightened the possibility that western countries could slap new sanctions on Russia, delivering a big blow to the ruble. Increased sanctions on Russian officials and its economy have been the main driver of RUB weakness over the last two years. German Chancellor Angela Merkel already agreed last week that the Nord Stream 2 gas pipeline could be halted in a potential response to the poisoning of the Russian opposition figure. The EU-Russia headlines of the past weeks were followed by EURRUB briefly breaching the psychological 90.00 level, although it pared back most of its losses that same week. If the EU-Russia relationship deteriorates further in the coming days, EURRUB is likely to breach that 90.0 level again. Emerging market bond flows have been sparse since the start of the pandemic, as investors are not picking up high yielding debt like they did pre-pandemic. For Russia, bond flows have been even more limited since their domestic political risks dominated headlines.

We foresee USDRUB trading around the 75.00 level until year-end, before a general EM rally begins in 21H1 with the pair trading back to 68.00 by Q2-end

Looking ahead, the ruble’s weakness will likely continue to reflect rising geopolitical risk in the country and renewed concerns. There are also positive arguments for a pause in the ruble’s tumble. Gauges of manufacturing and services industries beat forecasts by a wide margin last week, highlighting the strong recovery the Russian economy is undergoing. Additionally, since the last meeting, the Economy Ministry outlined an improved 2020 outlook and the Kremlin’s Economic Aid Maxim Oreshkin stated that Russian business should recover without new state support. The newest version of the forecast states that GDP is set to shrink 3.9% in 2020, compared to the previous estimate of a 5% contraction. The economic recovery, further developments in oil prices, and any easing in international tensions could spark a rebound for the ruble, but until then, the central bank will have to wait and see how recovery unfolds – pointing to a hold on September 18, in line with the consensus forecast and market positioning implied by swaps prices. Past Q3, the US Federal Election remains another potential risk for the exchange rate as previous political interferences by Russia could result on an increased risk of international sanctions. We don’t expect a recovery from the 75.00 level in USDRUB this year due to this and markets aversion to EM debt, but with the election out of the way and an expected improvement in global growth conditions in 2021, we envisage foreign investors returning to Russian bond markets and a sustained rally in the ruble.


Author: Ima Sammani, FX Market Analyst



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