Of the many quandaries investors must grapple with this year, high on their list is Donald Trump’s relationship with Vladimir Putin. Not far behind is this — should they throw off their instinctive caution about Russia and its president, and push the rouble a lot higher?
The turnround in the Russian rouble’s fortunes largely reflects the recovery in the price of oil, the country’s biggest export. That has helped drive the currency higher by nearly a third to about Rbs60 in the past year. Notably, the rouble has outperformed every other major or emerging market currency against the dollar in the past three, six and 12 months.
Factors beyond oil’s rebound also explain the rally. High interest rates in Russia make it an attractive carry trade opportunity for speculative investors borrowing in currencies with lower rates, while Mr Trump’s election has thrown up the prospect of a US rapprochement with Russia and the easing of western sanctions.
“All the signs are that sanctions will be lifted very soon” now that Mr Trump is in office, says Paul McNamara, investor director at GAM. Russia is “in a sweet spot”, he says – growth is picking up, inflation is down and the oil price is favourable.
The dilemma for investors at a time of unease about the outlook for emerging markets in general, led by Mexico and Turkey, is whether Russia still offers a compelling opportunity after such a big rouble surge.
1. Jan 12 2016 — Oil drops below $30 for the first time in 13 years amid supply glut worries
2. Jan 21 — Rouble hits historic lowof Rbs85 to the dollar on growing concerns about Russian economy
3. April 28 — Donald Trump says it would be “a tremendous thing” for the US to do a deal and get along with Russia
4. Sept 29 — Oil rallies after Opec members strike deal to cut production, the first in eight years
5. Dec 12 — Donald Trump nominates Exxon CEO Rex Tillerson, who has close ties with Russia, as secretary of state
Nikolaos Panigirtzoglou, a market strategist at JPMorgan, says: “Recent investor positions in the rouble are up there with that of oil and base metals so it remains the most overbought currency, if not asset, in the world.”
Others believe the rouble still has momentum on its side.
Alessio de Longis, portfolio manager at Oppenheimer Funds, says the Russian currency is among the most investible in the world, adding that “at the moment we think Russia is a very good investment candidate and we are overweight the rouble”.
However, such bullish sentiment comes as the strength of the currency has become an issue for policymakers in Moscow. The rouble’s recovery has prompted Russian ministers to complain openly that it is too strong for the good of its exporters. The central bank meets next week amid some speculation about FX intervention to dent the currency.
Piotr Matys, EM FX strategist at Rabobank, plays down that scenario. More likely, he says, is a rate cut to preserve the competitiveness of the Russian economy. It would also reflect central bank confidence in hitting the official 4 per cent inflation target, “but it could be also interpreted as a warning signal that they will not tolerate excessive speculative inflows”, Mr Matys says.
Goldman Sachs agrees about how the central bank is thinking. Interventions by policymakers were “very unlikely” and any response to the rouble’s strength would come through “a faster cutting cycle”, its economists say.
Still, Mr McNamara argues that Russians are uncomfortable with the rouble’s strength and keen to rebuild its depleted foreign reserves, so central bank intervention could yet happen — hence his reluctance to build new long rouble positions at present, although he concedes that the rouble carry trade can run a little further.
While the allure of buying a high-yielding currency can propel the rouble higher, investors could hardly be blamed for shying away from exposing their portfolios to this particular carry trade. No matter the plausibility of continued capital inflows, oil’s rebound and sanctions easing, the problem is that investors have been thrown off course by Russia in the past and might fear a repeat.
“The larger the flows, the bigger the risk to financial stability as such flows can be suddenly reversed when the external environment worsens,” Mr Matys argues, or when a new headwind emerges.
So anxious investors may therefore be better off viewing the rouble through the prism of other risky currencies. Compare the rouble with Turkey’s lira or Mexico’s peso, says Mr de Longis, and you would conclude that the rouble “feels less risky”.
And another reason for feeling more comfortable with the rouble at these levels, he says, is tied up with its biggest export product.
“The current stabilisation in the oil price goes a very long way to mitigating Russian risk and maintaining a normal dynamic in balance of payments and capital flows,” says Mr de Longis.
So, too, would the thawing in relations between Russia and the US. Ultimately, the rouble looks well placed for further strength — provided Mr Trump and Mr Putin rub along together.