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Russia’s rouble outperforms major currencies

Russia is set to round off a year of rejuvenated global standing with the distinction of watching its currency stand apart from other major economies and resist US dollar strength.

The rouble has been the only major currency to appreciate against the dollar since the end of September and, so far this year, has outperformed rivals, up more than 21 per cent against the dollar to Rbs60.48.

The combination of rising oil prices and hopes that Donald Trump’s US presidency will warm relations between Russia and the west has boosted the rouble, raising the profitability of local-currency assets and encouraging an inflow of money from non-residents that has lifted prices in Russian equities and bonds.

The Micex, Russia’s main stock market index, has jumped 24 per cent this year in spite of sanctions while Russian bond funds tracked by EPFR have chalked up the largest inflows since the first quarter of 2015 — cutting the cost of borrowing for companies and the state.

Nafez Zouk at Oxford Economics said that, with Russia’s benchmark interest rates on hold at 10 per cent — far above any developed economy — oil prices relatively steady and the public overtures between Vladimir Putin and Donald Trump still positive, there is every reason to think the trend in the stronger rouble will continue into next year.

“An increased interest rate differential and more supportive balance of payments developments will help the rouble strengthen,” he added.

Credit analysts pointed out that, while the country’s currency has strengthened, it comes from a low starting point, given that Russia has struggled to recover from a downturn triggered by the sharp fall in oil prices and US and EU sanctions following its annexation of Ukraine’s Crimean peninsula in 2014.

Analysts also said they remained concerned about the way in which external factors are leading the rally in Russian assets.

Within the country, inflation at just under 6 per cent means incomes and savings are being eaten away by rising prices, while publicised plans for structural reforms to boost the economy and reduce reliance on energy have yet to materialise.

“The rouble’s impressive performance can be mainly attributed to higher oil prices,” said Piotr Matys at Rabobank, who warns that this could lead to its own problems.

“An excessive appreciation of the Russian currency may undermine the substantial competitiveness gained by Russian exporters since 2014,” he said.

The rouble’s appreciation is also at odds with the major sell-off in emerging market currencies triggered by the result of the US presidential election in November, as investors worried about protectionist trade policies and higher yields in US assets following rising interest rates.

Redemptions from emerging markets equity and bond funds jumped have jumped since the election, while around $65bn has flowed into US equity funds as investors bet on the new Republican government to spur domestic economic growth.

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