Investors are betting on a new era of improved US-Russian relations following Donald Trump’s victory in the US presidential election — anticipating that a possible easing of economic sanctions and a reduced risk of capital flight will make the rouble more robust than other emerging market currencies.
At the end of last week, the rouble escaped the worst of a brutal sell-off in emerging market currencies that followed Mr Trump’s election success.
The Turkish lira and Mexican peso hit all-time lows against the dollar as investors worried that protectionist trade policies would encourage capital outflows from developing economies.
Citi analysts dubbed the falls in emerging market currencies the “Trump slump”, and announced they would be taking a more cautious approach towards emerging markets.
The conditions that have supported a rally in emerging markets this year are expected to come under pressure following Mr Trump’s election. Investors anticipate that rising US inflation and interest rates will end the desperate search for positive rates that drove billions of dollars into increasingly risky asset classes.
While the rouble did not escape the sell-off entirely, its 3.6 per cent drop against the US dollar since Mr Trump’s win compared favourably with the peso’s 13.6 per cent fall and the South African rand’s 8 per cent drop.
In the course of his campaign, the president-elect praised Russian president Vladimir Putin and indicated that, if in power, he would consider removing sanctions passed against the country over its interference in Ukraine.
These sanctions amplified an economic crisis in Russia driven by the collapse in oil prices that sent the country into its longest recession in 20 years, freezing it out of global markets. But some investment firms believe this may now change.
“Even if the sanctions can’t be removed under Trump, we could still expect a significant easing in the spirit of sanctions,” said Oleg Kouzmin, chief Russia economist at Renaissance Capital. He forecast that capital flight from Russia would be more subdued in 2017. “This could reopen access to international markets for non-sanctioned entities,” he argued.
Ivan Tchakarov, chief Russia economist at Citibank, said: “The broader feeling that a more lenient US foreign policy might ensue under Trump is, in my view, indeed the key reason for why the rouble is doing better on a relative basis. However, this premise will obviously need to be confirmed by real actions coming from the president-elect.”
Last week, Mr Trump’s victory triggered a rally in equities and sell-off in bonds as markets speculated that the new president would begin a programme of spending and tax cuts that would raise inflation.
In emerging markets the sell-off spread from currencies to bonds, sending JPMorgan’s index of average emerging market bond yields to a five-month high as prices fell sharply. Half of the last six months’ gains evaporated in the space of two days, noted Heinz Rüttimann, emerging markets analyst at Julius Baer.
Anthony Simond, emerging market strategist at Aberdeen Asset Management, warned that many were trading on their best guess of Mr Trump’s policies, before they became clear. “Russia’s outperformance compared to other emerging markets is purely on the perceived possible rapprochement with the US that played out in the run-up to the election … It’s chaotic out here in EM right now so people are clinging to whatever bit of information they can glean.”
Others said the move made sense given the attention Mr Trump has paid to Russia.
Jakob Ekholdt Christensen at Dankse Bank called the rouble’s performance a “win-win”, saying it had weakened less than expected and rebounded quickly. But, he added, there remained questions about how oil prices crucial to Russia’s revenue would be affected if the US pursued energy independence — and said there was no certainty that the sanctions relaxation endorsed by Mr Trump would be supported by others.