Currency strengthening/appreciation

What prospects for ruble are in the new year?

For the first time in four years January currency bidding on the Russian market started with the ruble appreciation. Growth of the national currency rate continues on the backwards of the oil prices recovery and keeping demand of foreign investors for ruble assets.

Long-expected appreciation. Strengthening of the ruble started in the second half of 2016: oil prices exceeding USD 50 per barrel and the new president of the USA became the best recovery tools for the Russian currency weakened in the beginning of the year. As a result, ruble strengthened positions almost on 22% against dollar for the previous year and, according to Bloomberg, showed the best dynamics among all the world currencies. Growth comparable to ruble showed only Brazilian real with the exchange rate growing against USD on 21%. Majority of developing countries showed negative dynamics. The exchange-value of ruble against euro has also significantly grown for the previous year – almost on 19 RUB/EUR. Thus, the national currency demonstrated the most significant appreciation for recent history. The beginning of the new year became for ruble as successful as the end of 2016: for the first time since July, 2015 the exchange-value of dollar decreased below the psychological threshold 60 RUB/USD, and the exchange rate of euro decreased below 63 RUB/EUR. As a result, Russian ruble again became leader among currencies of the developing countries.

Historical decline. Speaking long-term, oil is still a key factor for growth of the exchange rate of the Russian currency. Leading part for that was historical decision of the Organization of Petroleum-Exporting Countries (OPEC) that became the most important event of the end of 2016. For the first time since 2008 the cartel agreed on cut in oil output, moreover, not only countries – members of the organizations, but also 11 other oil manufacturers, that are not members of the OPEC agreed to decline oil output. Claim of the Oil Industry Minister of Saudi Arabia on readiness if required to decline oil output above agreed to became an additional growth driver for the energy source prices. As a result, oil quoted prices have come back to maximum values since July, 2015 and Russian ruble has significantly strengthened positions.

Awaiting the removal of sanctions. If during most of 2016 the exchange rate of ruble followed world oil market prices, so for the last months reference of the ruble to oil prices has notably weakened. Expectation of cooling of tension between Russia and the USA after election of the president Donald Trump also contributed to this. The new president of the USA is friendlier to Russia and can consider the removal of sanctions question, that is, undoubtedly, positive for ruble and Russian economy. Expecting the relaxation of sanctions, the demand of foreign investors for ruble assets has shortly grown. According to the data of Emerging Portfolio Fund Research, for six weeks after victory of the leader of the republicans, investors contributed to the Russian funds more than USD 1 bln.

Oil dependence. Speaking of positive factors helping to the ruble appreciation, it should be remembered that the long-term strengthening of the Russian currency of the national economy is possible only when it is on the backwards of the prices growth. Currently dependence of the exchange-value of ruble from oil is decreasing, but it cannot disappear, while export amount that directly depends on oil prices is the fundamental basis for external accounts of the country. However, ruble oil valuation is still on the comfortable for the budget rate. Now, when it is obvious that growth of oil quoted prices is a long-term tendency, in view of November summit of OPEC, many investors changed their attitude to ruble. Under such conditions market participants leave open the possibility of further appreciation of the Russian currency. If oil price remains on the attained level, demand for ruble will also grow on the part of the long-term investors – not only foreign, but also local ones.

To realize potential. Under current macroeconomic conditions it is very difficult to give precise long-tern forecasts, however, most experts agree that the potential for the ruble appreciation is accumulated, and foreign investors show bigger interest in Russian assets. Currently, the national economy looks attractive that most of the other developing countries, that if realizing of current positive expectations – fulfillment of the OPEC plans on decline of oil output and rapprochement of the USA and Russia – it will contribute to further appreciation of the exchange rate of the national currency, hence, to general stabilization of the economic situation in the country.