Photographer: Andrey Rudakov/Bloomberg

Never Mind the Sanctions, You Can't Ignore the Ruble Carry

Worried the risk of fresh U.S. sanctions and falling oil prices will keep Russia’s ruble under pressure? Don’t fret, says the currency’s top forecaster.

The allure of one of the highest interest rates globally will eclipse the factors that drove the ruble to its worst quarter since 2015, according to Sebastien Barbe, head of emerging-market research and strategy at Credit Agricole CIB. Last quarter’s most-accurate ruble watcher sees the Russian currency recovering to trade at 57 per dollar by the end of the year.

“The risk of new sanctions has been priced in by the market so I don’t expect this to produce additional negativity,” Barbe said by phone. “A lot of people are still looking for some carry in emerging markets. Even with the central bank’s rate cuts, the rates in Russia remain very high."

Credit Agricole is siding with ruble bulls like Credit Suisse Group AG and Nomura International Plc as market participants remain split on whether the currency’s 4.5 percent, March-to-July drop will continue. Underpinning Credit Agricole’s forecast is a $54-per-barrel prediction for the price of oil by the end of the year as the OPEC supply-cut deal holds and global demand remains stable.

Carry Trade Defined, or Why Interest Rates Matter: QuickTake Q&A

“A lot depends on the oil prices--if oil prices don’t fall a lot, then there’s a strong case for the Russian carry trade,” Barbe said.

The ruble climbed 0.2 percent to 59.8825 against the dollar by 6:41 p.m. in Moscow, halting three days of declines. Brent crude added 2.2 percent, trimming Wednesday’s 3.7 percent slide.

Investors borrowing where rates are low and using the funds to buy higher-yielding assets have made a 6.8 percent return from the ruble this year as the central bank signaled it will cut rates only gradually. Since September, policy makers have delivered a cumulative 100 basis points of cuts, compared with 4 percentage points in Brazil over the same period. Even if policy makers reduce the key rate by a further 75 basis points this year to 8.25 percent, the real yield would still be “very high,” Barbe said.

While Credit Agricole is positive on the ruble in the short-term, Russia will struggle to return the economy to the pace of expansion seen before commodity prices tumbled in 2014, Barbe said.

“Right now there’s a perception that Russia is coming back, exiting the recession, but once the period of normalization is over, the market will ask the question of whether Russia can go back to strong rates of growth like we saw 10 years ago,” Barbe said. “A lot of things suggest that it’ll be very difficult for Russia to grow by more than two percent every year."

    Before it's here, it's on the Bloomberg Terminal.