Sanctions are once again catching up on the ruble.
While still the best performer in the world this year, no emerging-market currency has fallen more in the past month as the effect of rebounding oil prices faded. Approaching foreign-debt payments and a shrinking economy probably mean it has a further 10 percent to drop this quarter, according to BNP Paribas SA’s Piotr Chwiejczak, the most accurate ruble forecaster in the four quarters through June 30.
After a year of sanctions over Ukraine, Russian corporations remain shut out of foreign capital markets, meaning someone needs to sell rubles every time an international debt is paid. As well as a corporate bill this quarter that’s more than half as big again as the previous three months, the ruble is also under pressure as the Bank of Russia continues to buy foreign exchange, fueling speculation the government is demanding a weaker currency.
“Rolling over debt has become a problem for companies under sanctions,” Chwiejczak said by phone on Thursday. “Russia has serious long-term structural issues.”
The ruble has slumped about 11 percent since the Bank of Russia’s purchases, designed to help rebuild its reserves to $500 billion from $362 billion, began on May 13. Companies need to pay back or refinance $33.4 billion of foreign debt through September, with almost half of the total coming due that month, central bank data show. On top of that, Brent crude has fallen about 7 percent since mid-May.
The range of factors buffeting the Russian currency make its strength or weakness in three months’ time hard to predict, according to Chwiejczak, who says the ruble will end the period at 62. It dropped 0.7 percent to 55.89 versus the greenback as of 6:15 p.m. in Moscow.
In April, Chwiejczak lowered his exchange-rate forecast for the end of the second quarter to 58.94, while the currency finished the period almost 7 percent stronger.
Regardless of the discrepancy, Chwiejczak sees risks for a “gradual weakening” through September. “Major drivers for the ruble will be sanctions, economy, Ukraine, external debt payments and oil,” he said.
The European Union last month extended its penalties over Russia’s role in the conflict in eastern Ukraine.
Dmitry Polevoy, the chief economist at ING Groep NV in Moscow, was more bullish on the ruble’s prospects, saying it will weaken only slightly to 56.1 in the period. The fifth most accurate forecaster expects oil will be supportive as it recovers to average $70 per barrel. That’s more than 12 percent above where Brent was trading on Thursday.
Options data compiled by Bloomberg show a 57 percent probability that Russia’s currency will reach the level Polevoy envisages by Sept. 30, compared with a 21 percent chance for the drop forecast by BNP Paribas.
Higher oil prices “will neutralize the negative effect from rising foreign-debt payments and concerns regarding a possible September rate hike in the U.S.,” Polevoy said by e-mail.
Still, with 50 percent of Russian budget revenue generated from oil and natural gas industries, Chwiejczak at BNP said it’s in the government’s interests to keep the ruble lower. It slid 5.4 percent against the dollar in June, the most since January.
Having a weaker currency boosts budget revenue from exports priced in dollars and euros. It’s also a “much more potent” tool than government spending to counter the economic slump, because it makes local producers more competitive, President Vladimir Putin said last month at the St. Petersburg International Economic Forum.
The economy will contract 3.5 percent this year, the first recession since 2009, and the budget deficit will be the widest since 2010 at 3 percent of gross domestic product, economist forecasts compiled by Bloomberg show.
“Russia will need to keep the ruble weaker to fill the budget,” Chwiejczak said. “Russia is facing not just sanctions, but also a very high reliance on the oil price. So the central bank had to find an equilibrium between all its supportive measures and huge political uncertainty.”