How much faith do we invest in the rouble rally ?

Friday 1st May 2015

How much faith do we invest in the rouble rally ?

"The worst is yet to come" , The Economist p.68

"Rouble's recovery prompts rate cut from central bank" , The Times , p.53

News that Russia's main interest rate has been cut by a larger than expected 1.5% ((from 14% to 12.5%) and the more optimistic noises emanating from that country suggest that in Moscow at least, they believe the corner has been well and truly turned. In 2014 the rouble virtually halved in value against the US$, and also made historic lows against the Euro and Sterling. Investors withdrew some $150bn from the country despite rates being hiked to 17%, but since January the rouble has rebounded sharply and Russian stocks and bonds have also performed well.

Many would argue that the fate of the rouble relies largely on two things : the price of oil (as always), and events in the Ukraine (currently). Thus the rally in oil and a shaky ceasefire in Ukraine that has prompted hopes of a weakening of sanctions against Russia accounts for recent moves. People can decide for themselves what the future is likely to hold for both those factors, but at the very least they need to be aware that things can go either way.

And what of the situation behind the headlines ? Inflation is running at a 13yr high of 16.9% and GDP fell 3.4% in the year to March . The central bank is talking a good game about inflation (of course !) but may be forced to reverse rate cuts, with a predictably adverse effect on growth. Bear in mind too that Russia has a mountain of dollar-denominated debt to repay this year (and the rouble is still weak, historically speaking) , and not much in the way of cash reserves to do it. In short, the fundamentals are poor. Investors backing the rouble and Russia are surely just taking a punt in the casinos named "Oil" and "Ukraine".