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The Worst is Yet to Come: Deutsche Bank Predicts Further Weakening of the Ruble Due to Navalny and the US Elections
September 15, 2020 16:44

Deutsche Bank analysts do not rule out that the worst for the ruble in 2020 is yet to come. But in November, the Russian currency may regain investor favor. In the short term, the main risks for the ruble are the aggravation of the geopolitical confrontation between Moscow and the West over the situation with Alexei Navalny and the victory of the Democrats in the November US elections.

At the beginning of this week, the ruble was losing ground against the dollar - the American currency rate exceeded 76.5 rubles per dollar, reaching a maximum since the twenties of April. By Friday, the Russian currency strengthened - on the evening of September 11, the dollar was trading below 75 rubles. Deutsche Bank analysts   indicate that the worst moments for the ruble in 2020 may still lie ahead.

Since the beginning of the year, the ruble has lost more than 15% against the dollar, which is the second-worst indicator among emerging markets (EM) currencies. “This is surprising given that other EM currencies have fundamental reasons for weakening - like the South African rand, Brazilian real or Turkish lira. In Russia, the current account surplus, large reserves and positive real yields have not helped the ruble in the last three months,” analysts from Deutsche Bank note.

Despite the fact that the ruble has broken through the 75 rubles per dollar mark in the past few weeks, the Russian currency is only now approaching its fair value, the note says. And although the ruble looks cheap from a fundamental point of view, the depth of the ruble's fall is still far from the dynamics of 2018 and 2015.

To understand how events may develop further, we need to wait for the situation with geopolitical risks to be clarified, analysts say.

The Trump and Biden factor

Now one of the risks comes from the United States, where the presidential elections will be held on November 3. “The alleged proximity of the US President Donald Trump’s administration to Russia could mitigate risks for the markets. In the meantime, the market is "assimilating" the possible presidency of Joe Biden," analysts write.

Biden has repeatedly promised to impose sanctions on Russia. Further outflow of non-residents from federal bonds is not ruled out while sanctions are being discussed, the note says. According to the latest data from the National Settlement Depository, in August the share of non-residents' investments in federal bonds decreased by 0.39 percentage points, to 28.5%. As of December 31, 2019, the share was 31.2%. The influx of foreigners into federal bonds is one of the factors supporting the ruble. “Now we remain in a “neutral” position, but in November we will consider the possibility of resuming “long positions” with the ruble,” the note says.

Factor of Belarus

The likelihood of increased confrontation between Russia and the West due to the political crisis in Belarus, analysts at Deutsche Bank assess as low. “There is a significant difference between the Belarusian crisis and the Euromaidan in Ukraine in 2014, which lies in the fact that Belarus does not have a pronounced pro-Western direction and there are no large groups advocating direct Russian intervention,” the note says.

The Navalny factor

The situation around the opposition politician Alexei Navalny, who, according to the German authorities, was poisoned, analysts assess as a more serious geopolitical risk.

“We consider targeted sanctions more likely. Broad economic or financial sanctions are unlikely, but their risk cannot be considered negligible. News that the German authorities, including Chancellor Merkel, may reconsider support for the Nord Stream 2 project if the Russian response to the Navalny incident turns out to be “unconstructive” has already put additional pressure on the ruble. Although we do not consider the suspension of a nearly completed project as a baseline scenario, such a risk should not be discounted,” the note says.

A more important signal is that Germany, formerly a pragmatic Western country, is increasingly seeking to link foreign policy and business interests. It is the prospect of a united confrontation of the West with respect to Russia that is more important for the markets than the short-term macroeconomic consequences of the possible suspension of Nord Stream 2, analysts say.

Author: Anna Dorozhkina

Tags: economic crisis Russian economy Russia international sanctions Alexei Navalny 

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