Russia Rate Cut in Question After Novichok Claim Hits Ruble

Bank of Russia’s easing run is looking more and more like a thing of the past.

The poisoning of Russian opposition leader Alexey Navalny with a military-grade nerve agent has triggered the strongest threat of new sanctions against Russia in months, battering the nation’s bonds and currency. While half the economists surveyed by Bloomberg forecast a quarter-point cut on Sept. 18, the weak ruble is adding to the reasons for Governor Elvira Nabiullina to keep interest rates on hold.

Russia Rate Cut in Question After Novichok Claim Hits Ruble

“Geopolitical headlines, such as the Navalny case, as well as the likely increased turbulence ahead of U.S. elections, will continue to weigh on the ruble and local currency bonds,” said Jens Nystedt, a New York-based money manager at Emso Asset Management.

Only the Turkish lira has performed worse than the ruble in the past three months. Even before Germany called for a coordinated response to Navalny’s poisoning, investors were on edge over the possibility of Russia intervening in neighboring Belarus, where protesters have called for an end to President Alexander Lukashenko’s 26-year rule. And the prospect of a win for Joe Biden in the November presidential vote could mean a tougher approach to Russia from Washington.

“If the ruble stays at the current level of 75.5-76 per dollar, then there is an increasing chance the central bank will remain on hold,” Renaissance Capital Chief Economist Sofya Donets said by phone from Moscow. The ruble edged 0.2% weaker to 75.455 per dollar as of 5:52 p.m. in Moscow, bringing its weekly loss to 1.9%.

Russia’s bond and derivatives markets have hinted at the end of easing for weeks. A rally in local debt, which took yields to a record low, ended in late May. Since the last central bank decision in July, when Nabiullina delivered her smallest cut in months, forward-rate agreements have shown rates almost unchanged over the coming three months.

Russia Rate Cut in Question After Novichok Claim Hits Ruble

Beyond the geopolitics and weak ruble, there are positive arguments for a pause.

Since the last meeting, the Economy Ministry has improved its 2020 outlook and Kremlin economic aide Maxim Oreshkin has said Russian business should recover without new state support. Gauges of manufacturing and services industries beat forecasts by a wide margin this week. Inflation, while still below target, continued to accelerate in August, with the rate reaching 3.6%, slightly above forecasts.

What Our Economists Say

“The central bank can look through a temporary bump in inflation. But if ruble weakness reflects rising political risk, that’s harder to ignore and could make policy makers more cautious.”

--Scott Johnson, Bloomberg Economics

For more, see RUSSIA INSIGHT

The economic recovery, and accompanying rebound in oil prices since April, are a reminder that the nation’s fundamentals are strong. While the ruble’s drop on Wednesday was its biggest since the peak of the market rout this year, any easing in tensions, or international penalties that are deemed mild, could spark a rebound.

“Over the longer term, improved relations between Russia and the West would benefit Russian assets significantly,” said Emso’s Nystedt. “But over the next few months focus will be elsewhere.”

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.