Why The Russian Ruble Is Stabilizing

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Includes: ERUS, RBL, RSX
by: Andrew Sachais

Summary

Russian interest rates have stabilized in recent months.

Meanwhile, the pace of inflation slowed its acceleration higher, but remained at record levels.

Investors have largely priced in expectations for Russia's economy going forward, meaning volatility in the ruble should decrease in coming months.

The Russian ruble stabilized in recent weeks as the pace of inflation slowed, alongside steadying government benchmark rates. Since July, the U.S. dollar appreciated against the ruble by nearly 80%, but the pair has traded sideways the last few months, seen below.

Data provided by Trading View

Steadying benchmark rates have led to inflows in the ruble. In March, the benchmark lending rate was set at 14%, down 100 basis-points from 15%, and in line with estimates for 14%. Over the last year, the benchmark rate has been increased to as high as 17%, from lows below 6%, and now to current levels. Even though the outlook for the Russian economy is not optimistic, it is relatively more optimistic than at points during the end of 2014. The Central Bank of Russia has conceded that inflation will remain high, and its economy will grow slower, but further large devaluations in its currency look to be over, for now.

"Structural factors continue to exert a restraining influence on economic growth, however, its slowing is becoming more and more cyclical. Weak economic activity will be conducive to inflation reduction. Further decrease in output is expected amid persistently low oil prices and foreign capital market inaccessibility for Russian borrowers. Fixed capital investments will continue to contract due to high prices for the imported investment goods, deterioration in companies' financial performance, tighter lending conditions, and high economic uncertainty.

The labor market will adjust to new conditions largely through real wage decrease and part-time employment, which along with a slowdown in retail lending growth will result in lower consumer demand. The ruble depreciation will partially mitigate the negative impact of changed external conditions, raising the competitiveness of Russian goods and containing imports along with slack domestic demand. As a result, only net exports will make a positive contribution to output growth," according to Trading Economics.

Inflation, as was mentioned above, has risen as the ruble drastically fell against many currencies around the world. In February, the inflation figure came in at an annual pace of 16.7%, up from the previous month's reading of 15%, while barely exceeding estimates for 16.6%. Over the last year, inflation has risen from under 8%, to current readings. The people of Russia have become accustomed to large price rises, reaching record highs in the most recent month.

"It is the highest figure since March of 2002 when it was recorded at 16.8 percent. Food and non-alcoholic beverages surged 26.1 percent, following a 22.8 percent rise in the previous month. Sugar cost increased 67.1 percent, cereals and legumes went up 51.5 percent, fish and sea products increased 30.8 percent and meat and poultry prices rose 25 percent.

Additional upward pressures came from transport (12.8 percent), housing, water, electricity and gas (9.8 percent), clothing and footwear (8.5 percent), alcoholic beverages and tobacco (15.5 percent) and hotels, cafes and restaurants (10.8 percent)," according to trading Economics.

Lastly, as inflation has risen, and consumer sentiment fell, economic activity slowed. The leading economic indicator in Russia is a monthly measure of economic activity. In January, the economic growth figure came in at an annual pace of -1.5%, below the previous month's reading of 0.2%. After showing steady growth in 2014, the measure of economic activity contracted in recent months. Lack of investment, and falling consumer spending due to increasing price pressures have weighed on economic activity.

Russia's economy is not strong, but is improving, and looks ready to embrace the weakness that lies ahead due to sanctions from the West, the low price of oil, and a war with Ukraine. Investors too have priced in expectations for the future of Russia, leading to a stabilizing currency. Expect the ruble to trade sideways in coming months against most currencies, even advancing against currencies that are easing policy, such as the euro.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.