© Dmitry Polevoy
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From our point of view, the recent Ruble depreciation was mostly driven by both local and foreign factors. In terms of global reasons, we would highlight the Fed tapering story and the Fed's intention to keep policy rates unchanged before the unemployment rate falls to 6.5%. Given that jobless level now is already 6.7%, the market still questions the credibility of this commitment and a chance of U.S. interest rates hike earlier than expected. This adds more worries and anxieties about the global investors' behavior, as they start withdrawing money from emerging markets, thus affecting all EM currencies, including the Ruble. So, keep an eye on US data flow to follow this risk.
In regards to the local factors, we saw the disappointing growth story, in terms of the economic activity, and worsening fiscal performance. Also, we witnessed the confirmation of the central bank's move further towards higher flexibility. All this weighs on the Ruble and subsequently contributed to the sell-off of the Russian currency. Therefore, we cannot say that it was the central bank's or the government's intention or special actions, because we still believe that the CBR (Central Bank of Russia) follows its FX interventions rules and policy, making no extra adjustments in its behavior. Therefore, we agree that the recent Ruble depreciation might probably be helpful for the economic growth and fiscal revenues, but at the same time we still cannot say that the recent Ruble's depreciation was a result of any specific action of the central bank or the government. Thus, more likely, it was mostly the fundamentally or market driven process, yet with still visible signs of market panic with some stop loss positions on the local bond and equity market. All of that contributed to this snowball process. Therefore, we saw quite a massive and very sharp Ruble weakening.
Do you expect the Ruble to rally during the winter Olympic Games held in Sochi this February? If yes will it be significant enough to regain the present losses of Russian currency?
With the current market stress and all the noise, it is difficult to make any strong calls about the short-term Ruble performance. I must say only that from the beginning of this year we have expected some appreciation of the Ruble over the first quarter of 2014, but in the reality we saw the nearly opposite move, a quite sharp retreat. We do believe that Olympic Games and some stabilization on the market might push the Ruble to a bit stronger levels in the upcoming couple of months, but it is difficult to predict the exact level, where the Ruble may end in the short-term forecast. Consequently, we still try to keep some moderate optimism about the short-term Ruble prospects. However, I would reiterate that from various fundamental factors and reasons, the Ruble still has some room to depreciate in the mid to long term, and therefore, it is still important whether the Ruble will continue falling to this fundamentally based levels or we will see some short-term rebound before the weakening trend finally wins in the second quarter or the mid of this year, which we currently expect.
What are the odds that we about to face a recession in Russia's economy in the foreseeable future and what they depend on?
We still do not expect a recession in the Russian economy. We may anticipate some stagnation of the economic growth in the range of 1 to 2% of GDP, which is quite low, but currently we do not talk about the negative growth rate for the Russian economy, because even taking into account all this market uncertainty and volatility, the oil prices are still at relatively stable level at above $100 per barrel. We expect improvements in the global economy, specifically in the U.S. as well as in some other regions. Therefore, from our point of view, there are no reasons to seriously discuss a recessionary trend in economic activity of Russia.
What will be the main drivers for the Ruble throughout the year of 2014?
In terms of the local factors, they are still mostly unchanged. Though, we still expect further deterioration of the current account surplus. Also we believe, that the capital outflow from the country will likely continue this year. However, at the same time the key question now is to what extent the recent Ruble depreciation will work as a stabilization factor for this negative trend in terms of current account dynamics and to what extent the Ruble weakening would affect capital outflow's pace of Russia, because in the short-term the currency may show quite sharp movements. Nevertheless, this sharp adjustment in the currency may work as a stabilizer for the current account, growth, import and other macroeconomic tendencies. Therefore, this will be crucial, and all these processes in terms of balance of payment performance and the Ruble performance will be interdependent. Taking into account the external markets, another factor is that investors are looking at the U.S. Federal Reserve monetary policy outlook, which will be decisive for the Ruble in terms of the overall investor's sentiment towards emerging markets and Russia.
What are your forecasts for USD/RUB for the end of Q1 and end of the year?
Our short term forecast for USD/RUB is around 34 level, however a lot will depend on market performance in the coming several weeks, which will be very important and crucial for the future Ruble outlook. Our current forecast for USD/RUB rate for end of this year is at around 35.70, probably close to the 36 level.