The ruble exchange rate has been depreciating rapidly in recent weeks. At first, this did not stand out because the US dollar was rallying sharply against most EM currencies. But more recently, the rouble’s decline became noticeable versus an already weak euro. Rouble weakness will now add to the central bank’s (CBR’s) anxiety about pro-inflationary forces, which makes a large 200bp rate hike a likely scenario for the 20 December meeting. One question we might ask is why USD/RUB or EUR/RUB – which are not truly traded exchange rates at all, only artificial ‘fixes’ – should react to each round of sanctions news, Commerzbank’s FX analyst Tatha Ghose notes.
USD/RUB and EUR/RUB to steadily trend up in coming years
“These exchange rates do not typically react to geopolitical or military news-flow, nor to news about rounds of sanctions, nor to domestic news about inflation or rate hikes. Such factors can influence arbitrage-seeking foreign capital flows, and thereby, the exchange rate. In Russia’s case, widespread sanctions prevent any free flow of hard currencies – for example, no yield-seeking capital can flow in in the hope of higher interest rates. More recently (in June 2024), all trading of euros and dollars were banned on the Moscow exchange via sanctions on the exchange itself, which further restricted the channels of FX access even for permitted activites.”
“The rouble fix is perhaps not entirely fictitious – some (weak) fundamental links have to exist. For example, energy and commodity trade is still permitted in US dollars and euros. The exchange rate at which this market will clear naturally has a bearing on where CBR might set the rate on paper. Similarly, capital flows are open versus other emerging markets, in currencies such as CNY or INR. As a result, CNY now dominates FX liquidity in Russia. In fact, the USD/CNY exchange rate is an important cross-link while setting the USD/RUB fix.”
“US sanctions against hitherto untouched banks, which are integral to clearing energy payments, and which had de facto taken over the role of central bank for hard currency, comes as a shock to hard currency demand and supply and is making USD/RUB and EUR/RUB spike up. Some part of this could well turn out to be early overshooting. Perhaps, alternative shadow channels will open up and smooth FX supply. That remains to be seen. We anyway forecast USD/RUB and EUR/RUB to steadily trend up in coming years. The current level has run ahead of our own forecast (our end-2025 USD/RUB forecast is 115.0 and end-2026 is 135.0), but the direction is entirely consistent.”
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