Another Six Years of Putin Could Be Bad News for the Ruble

(Bloomberg) -- For one of the ruble’s most prescient forecasters, six more years of Vladimir Putin will mean the currency’s back-to-back annual gains are about to hit the buffers.

“After the Russian presidential election, the market will have digested the story of Russia exiting recession,” said Sebastien Barbe, the Paris-based head of emerging-market research and strategy at Credit Agricole CIB. Traders will turn their attention to “the difficulty that Putin -- as the old-new president -- will face in upgrading the growth model,” he said.

The ruble’s appreciation will fade in the second half of next year and foreign inflows will “dry up,” said Barbe, who’s been the most accurate ruble forecaster in the second and third quarters according to a Bloomberg survey. The currency may initially strengthen because Russia’s comparatively high returns will lure investors, even as the central bank lowers interest rates, he said.

A slowdown in growth last quarter gives a taste of the stagnation to come and the economy will only get more sluggish after Putin’s expected election victory in March, according to Barbe. After posting the second-best gains in emerging markets in January through March, the threat of further U.S. sanctions has pushed the ruble toward the bottom of the pack in the last three months of the year.

Further declines won’t come immediately. Barbe predicted the ruble will close this year about 2 percent stronger at 58 per dollar and will climb to 57.5 in the second and third quarters as traders come to the conclusion they’ve overdone bets on the pace of U.S. interest-rate increases.

Another Six Years of Putin Could Be Bad News for the Ruble

“The market has front-loaded the increase in U.S. yields and at some point, there should be some stabilization, which could happen before the end of this year or at the beginning of next year,” Barbe said. “The carry trade will be a bit more powerful, so there could be more money coming back.”

The ruble was 0.6 percent stronger at 58.925 against the dollar as of 5:58 p.m. in Moscow on Wednesday, the best performer in emerging Europe.

The slowest inflation in Russia’s modern history has put its real rates among the highest in developing nations, even as the central bank is likely to cut rates for a sixth time this year on Friday. Traders who borrow in countries where rates are low and invest where they are high have received a 12 percent return in the past 12 months by betting on the ruble, the fifth-best performance among 23 emerging markets tracked by Bloomberg.

Putin, who has ruled Russia for 18 years, is almost certain to win the March election in a landslide. But households remain too cash-strapped to propel broader growth and he faces a challenging fourth -- and likely, final -- term as Russian leader.

As the economy founders, Barbe estimates the ruble will end 2018 1.7 percent weaker at 59 per dollar, in line with the average forecast of other analysts.

Getting Russia’s growth rate back up to the 3 to 5 percent pace seen before the 2014 Crimea annexation will be “very difficult,” he said.

©2017 Bloomberg L.P.