Five thousand rouble banknotes pass through a money counting machine at a store in Moscow. Russia’s currency has plunged more than 40% in the past year.

Bloomberg/London

Don’t get too excited about the Russian rouble’s best ever rally. That’s the advice of banks from Credit Suisse Group to Sweden’s SEB, which warn that the currency’s 12% gain versus the dollar this month is vulnerable because it depends on a Ukraine cease-fire and Brent oil staying at about $60 a barrel. Options traders remain more bearish on the rouble than on any of its 31 major peers, and strategists are cutting their forecasts to anticipate a 9% decline by mid-year.
“It’s not a turning point,” said Per Hammarlund, the chief emerging-markets strategist in Stockholm at SEB, which sees the rouble tumbling 10% by the end of next month. “The risk of an oil-price reversal is significant. A resurgence of fighting in Ukraine would also weaken the rouble.”
A relapse in the exchange rate would heap further pressure onto President Vladimir Putin as the economy teeters on the brink of a recession and investment flees the country. Russia’s currency has plunged more than 40% in the past year as the price of oil, its biggest export earner, almost halved and the nation’s alleged role in the Ukraine conflict prompted the US and European Union to impose sanctions.
The rouble climbed to a six-week high of 61.17 per dollar on Wednesday, up from a record-low of 80.1 on December 16, before weakening for the next two days to 62.174 as of 6:57 am New York time yesterday. It’s on pace for its best month since Bloomberg started tracking prices in 1993.
While Russia’s currency may advance to 60 per dollar if the Ukraine cease-fire holds, the market “is pricing in too much positivity in the rouble,” Alexey Pogorelov, an economist at Credit Suisse in Moscow, said by e-mail on Tuesday. The rally “has been largely exhausted,” he said.
The turnaround from last year’s worst-performing major currency to February’s biggest gainer was spurred by a resurgence in Brent crude futures, which reached a high for the year of $63 a barrel on Tuesday, before slipping back below $60 later in the week. Bank of America Corp, UBS Group and Commerzbank say the reduction in US drilling that prompted the rally won’t be enough to offset a global supply glut, and that prices will drop to $45 or lower in the next three months.
Not everyone’s so sure the rouble’s gains will prove fleeting. If crude stabilises at about $60 to $70, then “the rouble should rally because that makes Russia more sustainable,” New York-based James Barrineau, who oversees $1.5bn of emerging-market debt at Schroder Investment Management, said Wednesday in an interview in London.
It’s not all bad news on the economy, either. The central bank surprised markets last month by cutting interest rates, which strategists said signalled a newfound determination to arrest the economic slump, even if it comes at the expense of more rouble losses.
Forecasters surveyed by Bloomberg predict declines in Russia’s currency second only to Argentina’s peso by mid-year. Strategists have lowered their median estimate for the rouble to 68 per dollar, from a forecast of 63.5 at the end of January. SEB sees the currency ending June at 60, after sliding to at least 68 next month. To blame is the drop in oil and the sanctions imposed over Ukraine. The restrictions are devastating Russia’s economy, which the government predicts will shrink 3% this year. Standard & Poor’s became the first of the three major credit graders to cut the nation’s sovereign rating to junk on January 26, putting it at the same level as Bulgaria and Indonesia.
Russian, Ukrainian and European leaders agreed on Thursday to stand by the recent cease-fire accord, even after fighting forced the government in Kiev to abandon a strategic crossroads town in the east of the country.
“The fluid situation in Ukraine still demands a decent- size rouble risk premium,” Tom Levinson, a strategist in Moscow at Sberbank CIB, a unit of Russia’s biggest lender, said by e- mail on Tuesday. While some investors may be tempted to buy the currency because it’s now “very cheap,” they should be prepared for a “sharp” decline if fresh sanctions are imposed, he said. The cost of options to sell the rouble in three months has fallen, though they’re still more expensive than for any of the major currencies tracked by Bloomberg.
The so-called risk-reversal rate has dropped to 9.4 percentage points, down from a record-high closing price of 19.3 percentage points on January 9, data compiled by Bloomberg show. That’s still about three times the rate of 3.4 points at the end of September.
“Russia is facing a lot of headwinds, even if we disregard geopolitics and assume that oil prices will be higher,” Lars Christensen, the chief emerging-markets economist at Danske Bank, said by phone from Copenhagen on Monday. “We have a hard time seeing any sustainable long-term gains for the rouble.”