Ruble Bears Unimpressed by Rally as Putin’s Economy Sinks

Currency traders and analysts are showing no faith in the rebound that has made the Russian ruble the world’s best-performing currency this month.

The 3.2 percent rally in May through yesterday will fade into a rout that pushes it down by about 5 percent versus the dollar by September, according to strategists surveyed by Bloomberg. Among major currencies, only the Argentine peso is forecast to slide more during that time. Option contracts show traders see a 64 percent chance that, by year-end, the ruble will slide back to the record-low levels it reached in March.

While Russian assets rebounded this month as tensions with Ukraine eased, analysts are focusing on the deteriorating state of the economy. Inflation is soaring while the risk of recession builds as the international sanctions imposed on Russia curb investment.

“You had the rally, but if you look at macro fundamentals, the situation is even worse than it was two, three months ago,” Murat Toprak, the head of Europe, Middle East and Africa currency strategy at HSBC Holdings Plc, said yesterday from London. “You have more recessionary pressures on the economy.”

The ruble fell for a fourth day, weakening 0.2 percent to 34.6452 per dollar as of 11:25 a.m. in New York, down from a four-month high of 34.0092 reached May 26. It has fallen 1.3 percent against the central bank’s target dollar-euro basket this week, trimming its gain this month to 3.9 percent. The ruble is down 5.1 percent versus the dollar for the year, the worst performance among 31 major currencies after Argentina’s peso.

Bearish Projections

Toprak kept his third-quarter forecast for the ruble at 37 per dollar, or about 7 percent weaker than today’s level. That’s more bearish than the median forecast of 36.45 by more than 20 analysts surveyed by Bloomberg. Danske Bank A/S, Denmark’s largest lender, is the most pessimistic in the survey, predicting a fall to 40.7.

Putin has refrained from escalating tension in Ukraine after his annexation of Crimea in March triggered sanctions from the U.S. and the European Union. EU leaders this week put off further measures after Russia showed a willingness to work with Petro Poroshenko, who was elected president on May 26.

Heavy Fighting

Clashes continued in eastern Ukraine today as pro-Russian rebels downed a military helicopter in Slovyansk, 100 miles (160 kilometers) from the Russian border, Speaker Oleksandr Turchynov told the parliament in Kiev today. An economic adviser to Putin, Sergei Glazyev, said the U.S. controls the new Ukrainian government and is seeking to use the conflict to start a “third world war.”

The political turmoil is already undermining the world’s largest energy exporter, with fixed-capital investment slumping for a fourth month in April and inflation rising to an 11-month high of 7.3 percent. The International Monetary Fund last month cut its forecast for the nation’s gross domestic product growth this year to 0.2 percent, down from 1.3 percent, and said Russia may be in a recession.

“A lot of people trade the ruble on geopolitical concerns -- if you do that, you can lose the fortune of your life,” Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London, said in a phone interview yesterday. “Regardless of the political de-escalation, the fundamental backdrop for the ruble is fairly poor.”

Gas Deal

For Vladimir Osakovskiy, the chief economist at Bank of America Corp. in Moscow, the $400 billion natural gas deal that Russia signed with China this month may help prop up the ruble.

In what Putin called an “epochal event,” state-run energy exporter OAO Gazprom signed an agreement on May 21 to supply fuel to China for 30 years after more than a decade of negotiations. China may make as much as $25 billion in advance payments under the contract to invest in the necessary infrastructure, Russian Energy Minister Alexander Novak said.

“The deal with China could provide some support to the slowing in Russia’s potential growth, as it creates a new export revenue flow and growth driver,” Osakovskiy wrote in a note yesterday. The economist said he may raise his year-end forecast for the ruble from 35.5 per dollar as Russia’s currency may “benefit from capital inflows.”

In the options market, traders are more pessimistic. There’s an 84 percent probability that the ruble will reverse this month’s gain by year-end, according to data compiled by Bloomberg. The likelihood of the currency falling back to its all-time low of 36.9029 per dollar was 64 percent, compared with 60 percent a week earlier.

More Volatility

While traders pared their expectations for the ruble’s price swings, they still bet the currency will remain more volatile than most of its developing-nation peers. One-month implied volatility for the ruble fell to 10.1 percent today, from 11.2 percent at the end of last month. That’s the third-highest level among 23 emerging-market currencies tracked by Bloomberg, ranked after Argentina’s peso and South Africa’s rand.

“The pricing out of geopolitical risks might help in terms of asset prices, but they need deep structural and legal reforms to make this country attractive for investors,” Viktor Szabo, a London-based money manager at Aberdeen Asset Management Plc, said yesterday in an e-mail. The firm, which oversees more than $12 billion of emerging-market debt, is underweight Russia’s bonds and its currency, he said.

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