7/11/2014: Russian Ruble: Rough Days Ahead

Things are getting ugly in the Ruble corner today:

First this:

Via @Schuldensuehner

Then a bit of a recovery to this:

Via @Schuldensuehner

And in the longer run, this:

Three points:

1. Ruble is supposed to move to a free float by the end of 2014;
2. Central Bank of Russia abstained from intervening in forex markets between May and the end of September, but it has burned through ca USD68 billion so far this year in total defending the currency with USD22.21 billion of this in October alone (see chart below).
3. Central Bank announced two days ago that it will limit its interventions in the markets going forward to just USD350 million per day maximum cap. The Bank is taking a more 'random walk' approach to interventions, announcing that it will intervene in the markets only sporadically. This increased the uncertainty about Ruble supports. So far, Ruble is down more than 27% y/y to USD.

Remember, weaker Ruble offsets, in part, adverse effects of weaker oil prices on Russian fiscal balances. The bad news - from the exporting countries point of view - is that Russia's imports are becoming less and less affordable, pushing more activity away from European exports and in favour of domestic substitution. 

Per official accounts, CBR has sold USD25.232 billion and EUR 2.159 billion (gross of purchases) in the entire 2013, with major purchases starting in Q2 2013. In contrast in the 10 months of 2014 so far, CBR sold USD66.247 billion and EUR 5.426 billion, gross. Net of purchases, 2013 net sales of USD24.261 billion against 2014 (through October) net sales of USD63.426 billion; and 2013 net sales of EUR2.048 billion against 2014 net sales of EUR5.189 billion.

Overall, we can expect more rough days ahead for the Ruble, but a possible recovery in Q1 2015 once the risk re-pricing takes hold post free float and the effects of USD repricing in the wake of the US Fed policy decisions is complete.