The current ruble rate is where the government wants it to be – the fundamental rate is in the RUB75-85/$ corridor. Basically, the ruble exchange rate can go anywhere where the government or CBR want it to be. We calculate the ruble’s fair, i.e. fundamentally backed, trading range should be in the RUB75-85/$ corridor.  

We stand by this assessment, provided that the Russian FX market is fully open and commodity prices remain at their current high levels. However, from early May the ruble was trading in a RUB60-70/$ range and today the currency has broken through the RUB60/$ barrier for the first time in five years. This rapid appreciation of the ruble is not justified by the current state of Russia’s economy, even if one takes into account the extraordinarily strong surpluses in Russia’s external accounts, Macro Advisory said in a note.  

The Economy Ministry expects ruble weakness. Last week, the Economy Ministry issued its macro-forecast assumptions for 2022-25. In its review it assumed the average annual US dollar exchange rate in 2022 will be RUB76.7/$ and, by the year-end, the ruble will grow to RUB76/$.

Further short-term appreciation cannot be ruled out. The current momentum is very strong and, with evidence of short covering having to be "cancelled", the ruble may appreciate further in the coming days or weeks. That may lead to further easing by the CBR on the access side, i.e. easier to acquire and transfer FX. However, our view is that the ruble will again reverse course in the summer and end the year closer to our assessed fundamental value.

The ruble exchange rate is now fully managed by the state. However, because of sanctions, the government’s FX operations on this market have become increasingly covert: instead of open purchases of FX that were previously carried out by the CBR on behalf of the Finance Ministry, the buying of FX became spread through several smaller traders with affiliations to non-sanctioned Russian banks and/or financial companies. This FX is then stored in special accounts, which represent a new version of government (and CBR) international reserves. Part of accumulated FX is then used to pay for various government transactions, to make payments on behalf of key importers, or is converted into other, ‘friendly’ currencies as a move towards diversification of reserves to protect them from any possible new sanctions’ risks.

At current levels the ruble strength starts to look excessive – the government starts to act. While ruble’s recent strength could be characterised as partially fundamental (as it mirrors the very strong state of the country’s external accounts) and as partially artificial (because large potential buyers of FX – foreigners and locals – are cut off from access to the FX market), one thing is certain:

More FX liberalisation moves will follow, but full removal of capital controls is still not on the cards. We believe that in the coming weeks we might see more moves by the CBR and the government aimed at a further liberalisation of the FX regime. However, in two main areas such liberalisation might take much longer time: these include a full removal of controls on capital transfers for foreign companies and investors and the introduction of unlimited trade in cash dollars and euros for retail customers. The former move would lead to a surge in capital outflows and would result in a rapid devaluation of the ruble – this could endanger financial stability and create more pressure on Russian banks. The latter move, i.e. an unlimited sale of cash in dollars and euros, is not possible until Western sanctions are relaxed or lifted; currently, Russia has a deficit of foreign cash which means that the potential removal of exchange restrictions in $ and € are unlikely to make such cash easily accessible to Russians.