As President Trump continues to settle into the role, with confusion and sackings domestically, one of the international situations which we still have no information on is the policy in regard the Russian sanctions. Trump has spoken to President Putin but according to reports the sanctions were not discussed.
Strikes us that it would not be in Mr. Putin’s best interests to rush to have sanctions lifted as this would cause a further rally in the rouble; which has been a key weapon in Russia’s armoury to survive the fall in the price of crude over the last few years.
Indeed between June 2014 and its peak in January 2016 the rouble fell 141% against the US dollar moving from a price of around 34 USD/RUB to 82. This is somewhat in line with the fall in crude as measured by Brent which fell from a price of $112 per barrel (pb) to $28.55pb, 75%, over the same period. Since January 2016 oil has recovered somewhat, now trading at around $55pb and the rouble has also rallied 27% to trade around 60 USD/RUB.
The big devaluation in the rouble, although not popular domestically as it pushed inflation up, was essential and a well-managed policy to cope with the loss of oil income. Broadly, with Russian production costs, wages etc. all in rouble the fall in oil was offset within the Russian balance sheet by the currency weakness. This policy worked extremely well and just a few weeks ago the Russian Central Bank announced they would once again be building up foreign reserves by buying around $1bn in currencies per month. This is due to the Finance Ministry estimating that it will receive about RUB1tn ($16.7bn) in additional revenue this year with oil averaging $50pb.
Key to this of course is the value of the rouble; a strong currency could derail the process of recovery for Russia. Central to the central bank’s battle to manage the value of the rouble is Elvira Nabiullina, the bank’s governor since 2013. Nabiullina has orchestrated policy over the last few difficult years and has worked within Mr Putin’s government since he came to power in 2000, back then she was a deputy economy minister before becoming minister in 2007 and a key member of the Putin government.
As regular readers will know we still hold Russian quasi-sovereign debt in our portfolios, in hard currencies (currently USD and GBP) and have always looked at Russia as a viable investment opportunity due to the strong balance sheet of the country; with a four star rating under our Net Foreign Asset scoring system. From our point of view an easing in sanctions would likely be followed by upgrades from Standard and Poor’s and Moody’s who have Russia as sub-investment grade and would benefit our holdings almost immediately. However, if Ms Nabiullina and her colleagues at the CBR continue to add foreign reserves by managing the rouble's value, we feel the agencies will be forced at some time to reappraise Russia’s situation, even with a continuation of sanctions.