Last year, there was a trade to be done with the ruble as it approached 80/USD for its intraday low; many traders made money as it rebounded to almost 50/USD with Kremlin actions to stem the slide. There was hope that the Russian economy could rebound as many questioned the long-term staying power of sanctions and low crude prices. However, now the ruble is a falling knife that you shouldn’t try to catch, with developments in the oil market and Russia actions globally, as in Syria.
Bloomberg reports on comments from Credit Suisse in Moscow this way, Russia’s budget revenue is suffering because the ruble is overvalued relative to oil prices and policy makers should weaken the local currency by restocking the nation’s reserves, Credit Suisse Group AG said. “The central bank definitely has room for maneuvers until the ruble hits 80” per dollar, Valery Pushnya, the head of emerging markets in Europe, the Middle East and Africa at Credit Suisse Group AG in Moscow, said in an interview. That’s 17 percent weaker than its current level. Russians watched the ruble collapse beyond that level at the peak of the country’s market turmoil a year ago “and nothing happened,” he said.
Russia depends on oil to fund its federal budget and the price of crude oil is approaching its intraday low as well, with WTI breaking the psychologically important $40 recently before rebounding slightly once again. There is no end in sight to the oil glut. OPEC simply refuses to act to maintain a floor under crude in favor of maintaining market share and customer loyalty. Many analysts see crude bottoming eventually with at $20 handle. The upcoming OPEC meeting will most likely have oil bulls licking their chops as the Saudis continue to put pressure on American shale oil. What OPEC is not fully considering is that American shale oil production can be turned back on immediately once drilled, if prices rise. This fact will keep oil prices in this low range for a very long time.
Russian actions in the Middle East, such as routinely penetrating Turkish airspace, will not entice the Europeans to reduce sanctions on Moscow for the invasion of the Crimean Peninsula. On hold for a while, the conflict in East Ukraine is heating back up as well, as separatists attempt to force Moscow to pay attention to the failed region. However, Moscow doesn’t have the money with the threat from the Islamic State knocking on their southern border. The Assad regime, a long-term Russian ally, will fall without Moscow’s constant support.
Looking at the ruble situation from the thirty thousand foot level, the pressure to devalue to fund social and military spending seems to be immense. Russia cannot now back out of Crimea, East Ukraine, or Syria. Nor they will be able to for years, possibly decades. Russian troops are still in the Trandsniester region of Moldova and South Ossetia in Georgia after similar, frozen conflicts. These occupations will put immense strain on the Russian federal budget.
With Russian tax revenue shrinking as the economy contracts, there seems to be no way out but devaluation. Russian foreign currency reserves are also shrinking at an alarming rate and could be exhausted by the end of 2016 without further replenishment.
In other words, the ruble is going lower against major currencies. The bright side is that this will create further opportunities for those wishing to invest in the Russian economy. However, with ripe corruption and a distaste for the rule of law, the future for Russia seems bleak in the near term.
L. Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to many media outlets and is a foreign correspondent for Newsmax TV. LToddWood.com