aerial view of st isaac s cathedral in st petersburg

Over the past few weeks, we’ve seen the Russian Ruble (RUB) perform very well. The cleanest way of showing this is via USDRUB. It currently trades at 82.10, significantly below the 150 level seen in the middle of March. It’s also not far off the pre-war pricing, even though a lot of negatives have hit the Russian economy since then. So what’s going on here?

Imports dampened

Firstly, it’s important to appreciate the implications of the sanctions imposed both by Russia and on Russia from the West. As part of this, imports into Russia has drastically fallen.

From a currency point of view, imports weaken a domestic currency. To import goods or services involves buying the foreign currency to pay. On the flipside, it involves selling local currency to fund the purchases.

Therefore, the drying up of imports means that less RUB is being sold, and less USD or EUR are being bought. This naturally helps to stop weakness in the RUB in the process.

Natural gas speculation

On the other hand, RUB has gained over the past week on speculation regarding Putin’s demand for natural gas to be paid in local currency. Previously, countries in the EU and beyond had paid for commodities from Russia in USD or EUR.

With this new demand, RUB will see heightened buying in serious size from Governments if the proposal gets accepted. At the moment, the idea has been pushed back on by Germany, the UK and other nations. Yet even the headlines of the potential for this to happen have been enough to provide some strength for RUB.

High carry trade potential

Finally, it’s worth noting the impact of the hike in interest rates from the central bank to 20%. Even though this is a traditional tool to stem high inflation, it does also make a currency more attractive.

For example, with base rates in the UK at 0.75%, the yield differential by holding RUB over GBP is very high. Clearly, this comes with a large risk, the volatility of RUB.

Yet the hike in rates was significant, and certainly is a factor that has allowed the RUB to hold its ground.  

From our point of view, we’d take this opportunity to sell RUB rather than buy it. Once the dust settles, we think the Russian economy will show gaping holes. Over time that true cost of the sanctions should become evident, and we don’t think RUB will be a favoured emerging market currency for many investors for a long time to come.

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