Mocked As ‘Rubble’ By Biden, Russia’s Ruble Roars Back

Putin May Collect $321 Billion Windfall If Oil And Gas Keep Flowing. Mocked As ‘Rubble’ By Biden, Russia’s Ruble Roars Back

* Goldman, IIF Expect Record Current-Account Surplus For Russia
* Embargo On Energy Exports Can Tip Economy Into Deeper Crisis

Russia’s economy has staggered through the first full month of the war with Ukraine but it may yet emerge with a sparkling balance sheet if some of its biggest trade partners don’t turn off the tap on its exports of energy.

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For all the hardships visited on consumers at home and the financial chokehold put on the government from abroad, Bloomberg Economics expects Russia will earn nearly $321 billion from energy exports this year, an increase of more than a third from 2021.

It’s also on track for a record current-account surplus that the Institute of International Finance says may reach as high as $240 billion.

“The single biggest driver of Russia’s current account surplus continues to look solid,” IIF economists led by Robin Brooks said in a report. “With current sanctions in place, substantial inflows of hard currency into Russia look set to continue.”

The calculus may change completely, however, in case of an embargo on energy sales. And even without it, Russia’s oil exports and output are already falling, with the International Energy Agency predicting it may lose nearly a quarter of its crude production this month.

Many of the country’s traditional customers are also looking elsewhere and choosing not to sign new contracts for Russian supplies amid widespread condemnation of President Vladimir Putin’s aggression. Others like India are getting steep discounts.

The invasion of Ukraine has shocked Germany and its European Union allies into a radical shift in energy policy, and the bloc is rushing to cut its dependence on Russia.

For now, Europe’s largest economy opposes sanctions or political pressure that would prompt a full energy embargo. Only a handful of nations — including the U.S. and the U.K. — have imposed explicit bans on imports from Russia.

Oil and gas account for about half of Russia’s exports and contributed around 40% to last year’s budget revenue.
What Bloomberg Economics Says…

“Hydrocarbon revenue is a lifeline for Russia’s economy, helping to damp the impact of otherwise severe sanctions and stave off a balance-of-payments crisis. But even without an energy embargo, inflation is soaring and a deep recession looms.”

–Scott Johnson

Still, the combination of a steep ruble depreciation and a higher dollar price for oil will generate an extra 8.5 trillion rubles ($103 billion) in budget revenue this year, according to TS Lombard.

“The Finance Ministry will use some of it to cushion the blow but cautiously, not to spark inflation further,” said Madina Khrustaleva, an analyst at TS Lombard in London. “It seems that all these sanctions will destroy the non-energy part of the economy. Russia will depend on energy even more.”

Although the showdown over Ukraine has rattled energy shipments, the shock to imports and domestic demand will be so severe that the current account, the broadest measure of trade and services, may hit a new historical high after last year’s record $120 billion.

Goldman Sachs Group Inc., whose upward revision for the current-account surplus this year puts it at $205 billion, says it may be enough for the Bank of Russia to meet the private sector’s demand for foreign exchange and allow it eventually to loosen capital controls.

With Russian consumers already caught in a barrage of shocks from inflation to a hollowing out of incomes, Goldman economists predict a 20% collapse in imports this year, double the expected decline in exports.

A healthy balance sheet won’t save Russia from a deep recession, but it’s helping sustain government spending at a time when the government has no access to international capital markets. TS Lombard analysts said the ruble’s exchange rate is effectively backed by current inflows now that sanctions froze much of the central bank’s currency reserves.

Russia’s ability to sell oil and gas abroad may be the only thing keeping the economy from descending into an even worse financial meltdown.

The IIF, an association of the world’s biggest financial institutions, said an energy embargo by the EU, the U.K. and the U.S. would lead to a contraction of more than 20% in output and may cost Russia as much as $300 billion in export receipts, depending on price swings.

Updated: 4-6-2022

Mocked As ‘Rubble’ By Biden, Russia’s Ruble Roars Back

* Currency Recovers To Pre-War Levels Even As Sanctions Pile Up
* Foreign Oil And Gas Buyers Offer Putin’s Government A Lifeline

In the days after the Ukraine war began, the ruble’s collapse was a potent symbol of Russia’s newfound financial isolation.

International sanctions on Vladimir Putin’s regime sank it to a record low of 121.5 rubles per dollar, triggering memories of the battering it took during the 1998 Russian financial crisis.

Things looked dire enough that U.S. President Joe Biden said the ruble had been reduced to “rubble.”

Now, though, it sure hasn’t. The onshore ruble has surged all the way back to where it was before Putin invaded Ukraine, closing Thursday at 75.75 per dollar in Moscow.

What’s become clear is that despite an incredibly wide-ranging package of sanctions on the Russian government and its oligarchs, and an exodus of foreign businesses, the actions are largely toothless if foreigners keep guzzling Russian oil and natural gas — supporting the ruble by stocking Putin’s coffers.

Even as Russia remains mostly cut off otherwise from the global economy, Bloomberg Economics expects the country will earn nearly $321 billion from energy exports this year, up more than a third from 2021.

The rapid ruble recovery gives Putin a major victory back in Russia, where many people fixate on the currency’s ups and downs, even as his military gets bogged down in Ukraine and outrage mounts across the globe over atrocities it’s committed.

“For the politicians, it is a good PR tool by saying that sanctions don’t have any impact. And it will help to limit the inflation impact,” said Guillaume Tresca, a senior emerging-market strategist at Generali Insurance Asset Management.

Mocked As ‘Rubble’ By Biden, Russia’s Ruble Roars Back

Of course, some strategists say the ruble’s latest rally isn’t sustainable: The exchange rate is no longer free-floating and the currency would be at a very different level if barriers were removed.

In response to the sanctions, Russia enacted a series of capital controls that include freezing assets held by nonresident investors and telling Russian companies to convert 80% of the foreign currencies they hold into rubles. Trading volumes in the currency are now the lowest in a decade.

U.S. Treasury Secretary Janet Yellen urged lawmakers in Congress on Wednesday not to draw conclusions from the ruble’s rebound.

In Russia’s post-Soviet history, the ruble-dollar exchange rate has arguably been the economic indicator Russians care most about. The rate was broadcast by the exchange kiosks that sprung up in every town and city, flagging the currency’s collapse as hyperinflation erupted in the early 1990s. The government lopped off three zeros, yet the ruble dived again after Russia defaulted in 1998.

Then during the 2008 crisis, the authorities burned through billions of dollars to slow the currency’s slide, in part to avoid spooking the population and sparking a run on the nation’s banks. Governor Elvira Nabiullina decided to risk that in 2014 when sanctions over the Crimea annexation and slumping oil prompted her to switch the currency to a free float.

Today, it’s hard to ignore the lifeline other nations are tossing Putin by purchasing his country’s oil and gas. Doing so gives Russia a current-account surplus — economics jargon for exporting more than you import, which tends to lift a the country’s currency — and undermines the attempt to pummel Russia with sanctions.

“A current-account surplus should actually be another source of stability for the ruble,” said Brendan McKenna, a strategist at Wells Fargo Securities LLC. “If energy prices remain high and major importers of Russian energy and commodities continue to purchase, the current account should stay in surplus.”

Mocked As ‘Rubble’ By Biden, Russia’s Ruble Roars Back

Russia has been able to stabilize local markets and even stave off a messy foreign default — at least for now. This means that if the coalition of governments who oppose Putin want to hurt the ruble again, they’ll likely have to change tack.

Just this week, the U.S. Treasury barred dollar debt payments from Russian accounts at U.S. banks, an attempt to make Russia drain its domestic dollar reserves or default.

“As Russia’s economy and financial sector adapt to a new equilibrium of capital controls, managed prices, and economic autarky, it is not surprising that some of the domestic markets stabilize,” said Elina Ribakova and Benjamin Hilgenstock, economists at the Institute of International Finance. “Sanctions have become a moving target and will require adjustments over time to remain effective.”

They pointed to the likelihood of more tightening of financial sanctions, perhaps even disconnecting additional Russian institutions from SWIFT, the communications system banks use to move money around the world.

Putin has been forced to change his war strategy in Ukraine, shifting troops away from Kyiv after failing to conquer the capital. Research firm Tellimer Ltd. is warning against trusting market rallies amid negotiations to potentially end the war in Ukraine.

“Don’t buy the peace rallies,” said Paul Domjan, a senior contributing analyst at Tellimer. “Investors should be very cautious about market rallies following news about peace talks. There will be plenty of false dawns as the world valiantly seeks to end this war.”

Ruble Erases Invasion Loss Even As Default Risk, Sanctions Swirl

* Russian Currency Rallies To Strongest Since Before Attack
* Comeback Has Been Underpinned By Tough Capital Controls

The Russian ruble has wiped out the steep losses it incurred in the weeks after President Vladimir Putin sent troops into Ukraine.

The currency on Wednesday advanced past 81.16 per U.S. dollar in Moscow trading, the level it closed at on Feb. 23 — the day before Putin launched his attack. It’s a recovery that comes at an ironic moment, as sweeping sanctions cripple Russia’s economy and send the government teetering on the edge of default.

The ruble strengthened for an 11th session in 13 on Wednesday despite signs of further pressure, with the dollar-ruble pair dropping as much as 5% to 79.11 in local trading, before ending at 79.70.

The European Union and the U.S. are coordinating a new raft of financial sanctions against Russia, while the Finance Ministry said its attempt to service debt in dollars had been blocked, potentially moving the country closer to its first external default in about a century.

The ruble went into a nosedive immediately after the invasion on Feb. 24 amid international sanctions that effectively ended its time as a freely traded currency. But tough capital controls — including a ban on foreigners selling Russian assets as well as mandated hard currency sales by exporters — have helped the ruble regain ground.

Putin has also demanded that overseas buyers of Russian natural gas switch to making payments in the local currency. For now, though, Russia may be continuing to benefit from cash inflows as it sells natural gas and oil at high prices.

U.S. Treasury Secretary Janet Yellen, testifying at a Congressional committee hearing, on Wednesday said that people shouldn’t draw any deeper message from the ruble’s rebound, underscoring that the country has capital controls in place and saying that the market for rubles isn’t free.

The onshore rate came close to 122 per dollar in early March, a more than 30% collapse from the level before the attack. While offshore price sources at various points indicated even weaker levels, liquidity was severely hampered.

Updated: 5-20-2022

Ruble Hits 5-Year High As Gas Buyers Bend To Putin’s Will

* Euro-Ruble Volumes Surging As Exporters Convert Earnings
* Putin Demanded That Buyers Of Gas Switch To Ruble Payments

The ruble closed at the highest level in five years against the euro as more European companies appeared to be complying with Vladimir Putin’s demand that they switch to paying in Russia’s currency for natural gas.

The ruble jumped as much as 9% against the euro and ended Friday’s session 2.8% stronger against the dollar in Moscow. The Russian currency is the best performer globally this year.

Capital controls, collapsing imports and surging energy prices have left the ruble about 20% stronger than before the invasion of Ukraine almost three months ago. The central bank’s gradual easing of the restrictions on the market hasn’t been able to reverse the appreciation, which could become a problem for the budget as a large share of revenue comes in foreign currency.

On top of that, many foreign clients of Gazprom PJSC are complying with Putin’s demands by opening foreign-currency and ruble accounts with the gas giant’s lending arm, Gazprombank, to transfer funds for conversion.

“Pressure on the dollar and euro will increase as more buyers of gas open special accounts,” said George Vaschenko, head of Russian stock market operations department at Freedom Finance LLC. “There won’t be pressure every day — and the currency could fall back into the range of 59-60 rubles — but there will be fresh waves of strengthening for sure.”

Yuri Popov, an FX and rates strategist at Sberbank CIB, predicts that the ruble could reach 50 per dollar by the start of the third quarter.

Trading in the euro versus the ruble on the Moscow Exchange more than doubled in volume on Thursday compared with the previous day, according to Moscow Exchange data.

Under the new mechanism, importers of Russian pipeline gas must open two accounts at Gazprombank to handle payments for the fuel. Around half of Gazprom’s more than 50 foreign clients have already opened such accounts, Deputy Prime Minister Alexander Novak said earlier this week.

He didn’t specify the companies or countries complying with the new payment mechanism, saying only that some of Gazprom’s major clients have either paid for deliveries or are ready to pay on time, avoiding a supply cutoff.

Last month Gazprom halted gas flows to Poland and Bulgaria for non-compliance with Putin’s decree. In Finland, flows on a main pipeline are set to stop in the early hours of Saturday after the country refused to pay in rubles.

“The exchange rate could potentially go even stronger,” said Evgeny Koshelev at Rosbank. “The overhang of hard currency liquidity can’t be absorbed by internal means — banks are less and less interested since there’s no demand, the population doesn’t have any way of using it.”

Updated: 7-8-2022

Russian Inflation Slips To Lowest Since War Began On Ruble Surge

The ruble was the world’s best performer against the dollar in June with a gain of over 15%.

Russian inflation decelerated to the slowest since February, when the invasion of Ukraine prompted sanctions that disrupted imports and briefly caused shortages, as a deepening economic contraction and gains in the ruble choke off price growth.

Consumer prices rose an annual 15.9% in June, the least in four months and down from 17.1% in May, according to data published by the Federal Statistics Service Friday. The median estimate of 17 economists surveyed by Bloomberg was 16%.

The inflation outlook has reversed largely thanks to the inflows of petrodollars powering a historic rally in the ruble, which also remains shielded by some capital controls. A crash in consumer spending near levels last seen around the height of the coronavirus pandemic has also been a drag on prices.

With inflation subsiding, the central bank has been able to lower interest rates in four steep moves to their level before the invasion. The Bank of Russia last month revised down its baseline scenario for inflation and now sees it at 14%–17% by the end of 2022.

Policy makers also held out the prospect of deeper monetary easing in the months ahead. The central bank next convenes to review rates in two weeks.

Price Threats

Risks still abound. Further disruptions in the supply of goods are possible as companies draw down their inventories and re-route deliveries from abroad. The US and its allies are also discussing ways to cut into Russia’s oil revenues.

Some top Russian officials, meanwhile, have raised the prospect of intervening in the currency market to weaken the ruble. Governor Elvira Nabiullina has so far stood by the Bank of Russia’s inflation-targeting regime and said it doesn’t want to manage the exchange rate.

While the economy shrank at a faster rate in May, analysts at some major banks are turning more upbeat and now expect output to decline as little as 3.5% this year. A rebound in domestic demand may emerge as a factor in reviving inflation.

“The second round of inflation could be triggered by a gradual recovery in imports for intermediate consumption,” Raiffeisenbank analysts Stanislav Murashov and Grigory Chepkov said before the data release.

Updated: 8-4-2022

Ruble Rally Creates An Embarrasment Of Riches For Banks In Russia

Thanks to currency gains, assets are growing faster than they can be dumped.

You don’t often hear bankers embarrassed about a surge in profits. But Johann Strobl, chief executive officer of Austria’s Raiffeisen International Bank, sounded almost exasperated explaining its exceptionally strong gains driven by its business in Russia.

“While we are of course pleased to report record results … we have seen an unusual, high contribution out of Russia and an unprecedented appreciation of the ruble against the euro,” Strobl said on the bank’s second-quarter earnings call this week. “But I will do my best to walk you through the moving parts.”

The ruble’s rally has become another complication in the efforts of banks to exit the country. Companies that chose to get out quickly after Russia’s invasion of Ukraine have taken some hefty losses. French lender Societe Generale SA confirmed a 3.3 billion-euro ($3.3 billion) pretax hit from its retreat as part of its second-quarter results on Wednesday.

Others acting more slowly have seen exposures grow and profits jump as the currency strengthened. The question is whether these gains might tempt banks to drag their feet on disposals or even hold onto their Russian business. In truth, this is unlikely:

They might escape with smaller losses if they act fast, but with no end in sight to Russia’s aggression, they are still committed to getting out. Political and regulatory pressure isn’t going away — even if public interest has faded slightly — and financial risks could quickly worsen again.

Right now, however, banks’ Russian assets are growing faster than they are being ditched. Citigroup Inc. has been cutting loans and shedding customers, getting rid of $3.1 billion of assets in local currency terms in the second quarter, it reported last month.

However, currency moves still increased the size of its remaining Russian assets by $3.6 billion, leaving it with net growth of $500 million.

Raiffeisen, which has the biggest exposure to Russia relative to its size, cut loans in the country by 22% in the second quarter but saw its assets grow by 3.1 billion euros. All this is because the Russian currency rose by about 40% against both the dollar and the euro during the second quarter of the year.

Still, by cutting loans in local currency terms and by focusing on ditching the riskiest customers, banks are cutting their potential losses from an eventual exit. Citigroup said it had reduced its worst-case hit to $2 billion from $2.5 billion to $3 billion at the end of the first quarter.

The picture for UniCredit SpA of Italy is more complicated. It cut its Russian lending by 2.7 billion euros in local currency terms in the second quarter, but the rising ruble has increased the value of its equity in the Russian business to 3.5 billion euros from about 2 billion euros.

At the bottom line, it still managed to reduce its worst-case Russia losses from a bad exit by about 400 million euros to 3.5 billion euros.

It also saw a big recovery in Russian profits and because other parts of UniCredit’s business performed strongly, its worst-case Russia loss is also now a much smaller proportion of its total capital. “We believe 2Q’s turnaround underpins UniCredit’s plan of not selling its Russian subsidiary at any cost — in contrast to Societe Generale’s move,” wrote Bloomberg Intelligence analyst Tomasz Noetzel.

For UniCredit and Raiffeisen, Russian profits were turbocharged not only by the currency but also by a recovery in the local business and as Russian people and companies turned to foreign-owned banks as safer alternatives to place their cash and trade currencies.

All three banks insist they are continuing to hunt for ways out of the country. But not only is it hard to find an acceptable buyer, sanctions and government interests inside and outside Russia are also big and unpredictable hurdles.

The banks need to find solutions to their Russian exposures, however, in spite of the apparent local recovery and profit gains.

The country’s economy is weakening and is headed for a severe recession in 2023, which would make remaining exposures riskier – that matters less for Raiffeisen because its Russian subsidiary is separately capitalized and so mostly ring-fenced from the rest of the bank.

On top of that, the ruble’s rally is also not particularly reliable: sanctions mean that trading of the currency is thin. Even if the war against Ukraine ended and relations began to normalize between Europe, the US and Russia – which seems very optimistic – a reopening of finance and trade could just see the currency crash once more. One good quarter shouldn’t tempt any bank into a risky rethink on Russia.

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