One Reason Why Putin Might Not Rush to Shed Sanctions Yet

(Bloomberg) -- Russian President Vladimir Putin may want to wait awhile longer before broaching the subject of sanctions with Donald Trump.

While a drag on the economy since 2014, the penalties have kept some pressure off the ruble even as it rallied in the past year on the back of stabilizing oil prices. If the U.S. eases its curbs, the Russian currency would appreciate 5 percent to 10 percent, according to a majority of economists surveyed by Bloomberg, with 41 percent of respondents predicting a gain of 1 percent to 5 percent.

Trump’s shock election has already touched off speculation that he’ll loosen the U.S. squeeze on the Russian economy, drawing more capital to a currency that’s been a darling of investors through last year. With a stronger exchange rate eroding the competitiveness of local producers, authorities in Moscow sprang into action last week with a plan to resume purchases of foreign currency to ensure a greater predictability of the ruble.

“Russian officials won’t be too happy about the ruble’s rally and will certainly intervene,” said Vadim Bit-Avragim, a money manager at Kapital Asset Management in Moscow. “Look at their reaction to the current ruble levels. Of course, they won’t let it strengthen too much.”

U.S. sanctions imposed over the Ukrainian crisis didn’t come up in the first phone talks between Trump and Putin on Saturday, according to Kremlin spokesman Dmitry Peskov. The U.S. president has previously said he may consider recognizing Russia’s 2014 annexation of Crimea from Ukraine and lifting the curbs.

Whither Sanctions

While some of the penalties only include travel restrictions and asset freezes on people the U.S. believes were involved in the Ukraine crisis, the biggest damage came from steps that limited access to foreign capital markets for some of Russia’s biggest companies, from its top oil producer Rosneft PJSC to the biggest lender Sberbank PJSC.

The Russian currency has staged the world’s biggest rally since touching a record low last January. It’s up about 2 percent against the dollar so far in 2017 after its best-ever year in 2016, when it gained 20 percent. It traded little changed at 59.9734 as of 6:42 p.m. in Moscow on Tuesday.

The ruble will “likely to be the main beneficiary” if the U.S. eases off pressure from sanctions, and may appreciate to 55-57 versus the dollar, according to Bank of America Corp. That’s near the level that Industry Minister Denis Manturov said earlier this month could pose a risk to the competitiveness of Russian producers on external markets.

“If you go to the regions and ask companies what they fear most, the answer will be the lifting of sanctions,” Mikhail Matovnikov, chief analyst at Sberbank, said at a Moscow conference of the Association of European Business. “That will lead to capital inflows and thus to the ruble’s strengthening, which may hurt businesses. Sanctions are needed for Russian companies to compete.”

Trigger Interventions

A relaxation of sanctions may push the ruble “to outperform its fundamentals” and even send it below the 50 level against the dollar, according to Societe Generale SA. “This case would trigger the central bank to head off an appreciation bias with foreign-currency interventions via dollar accumulation in order to control financial-stability risks,” SocGen analysts including Yury Tulinov and Evgeny Koshelev said in a research note.

Such interventions would come on top of a mechanism unveiled by the Finance Ministry last week, with plans calling for the central bank to start buying foreign currency on its behalf in February when oil prices are above the $40 forecast for Russia’s Urals crude in this year’s budget. The ministry estimates it will get about 1 trillion rubles ($16.6 billion) in additional revenue if oil averages $50 a barrel.

“A further strengthening of the ruble will run into increasing resistance from exporters and the government,” said Sergey Narkevich, an analyst at Moscow-based Promsvyazbank PJSC.

To contact the reporters on this story: Olga Tanas in Moscow at otanas@bloomberg.net, Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net, Andre Tartar in New York at atartar@bloomberg.net. To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Paul Abelsky, Tony Halpin