Traders Assess the Viability of Investing in Russia
The Russian economy has been hit with falling demand across the board, while the ruble continues to slide against developed country currencies. Analysts expect the ruble to remain in the 65.3 range to the USD four the remainder of the year, provided the Fed does not raise interest rates on October 27/28 or in December of 2015. However, there are those who believe that the Russian ruble has no more safeguards on its inevitable downward spiral. The ruble started 2015 at 58.1157 to the USD, and today it is trading at 62.942152 USD. However, since February 2014 the ruble has lost 45% of its value against the greenback. This was due to Russia’s military expansionism into the Ukraine. Crippling sanctions sent the currency into freefall, and capital flight accelerated as international investors pulled their money out of Russia en masse. Given these realities, the year-to-date performance of the ruble has been remarkable, with only modest declines recorded. However the consensus estimate for the currency anticipates a 4 percentage point drop by December 2015.
What factors could prevent a freefall of the Russian ruble?
There are many reasons why economic analysts and currency traders do not see a run on the ruble taking place for the remainder of the year. Chief among them is the Fed’s reluctance to hike interest rates. That the US economy is sufficiently strong, and yet resists raising interest rates indicates that the state of the global economy is too precarious at this point in time. This bodes well for the ruble. The Fed’s policies are effectively driving traders and investors towards assets with higher risk. In other words emerging market economies and their mining and agricultural sectors have some breathing room for commodities traders to operate. That the Fed interest-rate hike will probably not take place in 2015 buys market participants some time to profit off this period of historically low interest rates in the US (0%-0.25%). While emerging market currencies have taken a serious hit in recent months, the fact that the Fed has not hiked rates is a blessing in disguise. Russia also has something else working in its favour: The price of oil is rising. Now that Brent crude oil is pushing above $50 per barrel, the revenues being generated by countries like Russia and various other Middle Eastern countries are significantly greater. Coupled with weak exchange rates, emerging market countries are able to generate substantially more Forex by trading commodities like oil for higher prices in USD. In the past year alone, Brent crude oil has lost 46% but it is slowly climbing upwards.
Russian authorities unlikely to make the case for a strong ruble
The Russian economy is set to experience yet another rate cut which is being done as part of a policy of monetary easing. By accelerating the velocity flow of money through the Russian economy, the central bank is expecting to boost economic activity. Economists expect the central bank to cut the interest rate by 50 basis points in Q4, 2015. But not everyone remains convinced that the ruble will gain ground this year; there are those touting an exchange rate of 70 or more to the US dollar by the year’s end. An appreciating ruble makes Russian exports more expensive, perhaps the reason why the government is unlikely to push for currency appreciation.
Of equal importance is the sharp decline in new car sales year-on-year, with a 29% reduction recorded in September. Ruble weakness is also causing the price of new cars to rise, thereby decreasing overall demand further. Among others, some 22 automobile manufacturers increased their prices in Russia in September 2015. The automobile industry is forecasting a 37% decline in new car sales for the year. Russia remains the world’s largest energy exporter, and it will face its first contraction in 6 years following weak oil prices and punishing sanctions from the US and Europe. Among 24 EM currencies, the ruble is now ranked the second worst performer over the past 12 months. President Putin is now embroiled in a military conflict in Syria, perhaps to stimulate the Russian economy and to shore up support at home.
Author’s Bio:
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise for the globally renowned spread betting company – InterTrader.
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