Ruble ‘Recovery’ Very Likely to Be An Illusion

• Investors have been recently questioning if the Ruble ‘recovery’ was ‘real’ or just an ‘illusion’ as some analysts are expecting up to a 30% contraction in GDP in 2022.
• We previously saw that while the CDS market is pricing in up to a 90% probability of sovereign debt default within one year, the RUB continues to strengthen against major crosses.
  • USDRUB fell below the 60 level last week, currently trading at its lowest level since early 2018.
  • EURRUB has also been falling sharply in recent weeks, trading close to a 7Y low.
• We even heard Kremlin Spokesman Peskov mentioned earlier that the government has been paying special attention to the ‘Ruble strength’.
• The CBR recently announced that it will hold an extraordinary meeting on May 26; policymakers are likely to cut the benchmark rate further to stimulate the economic activity (as hinted in previous meeting in April).
• It has been difficult to believe that the RUB is approaching early 2018 highs against the USD in the current environment (Dollar has been the ‘safe haven’ to hold since the start of the year), particularly given the current Russia fundamentals (confidence indicators at extreme lows, probability of default close to 1…).
• It is important to know that the Ruble is not a convertible currency anymore, which can attract arbitraging capital flows, therefore confirming that the current levels are ‘artificial’.
• In this chart, we compute a simple alternative measure of ‘RUB’ using a set of financial and economic variables.
• Interestingly, MNI ‘fair’ value of USDRUB prices in a exchange rate above 90; the chart shows the strong divergence between the ‘spot’ rate and the ‘fair’ value rate since the beginning of April.

Source: Bloomberg/MNI