"Nowhere to go but down." Russia's ruble seen falling further but at a slower pace, analysts say.

By Barbara Kollmeyer

Ruble weakens further after Wagner revolt

The Russian ruble is fishing for a bottom, but doesn't look to find it anytime soon, as the government may be ready to sacrifice its strength to balance a budget, say some analysts.

The ruble fell 0.1% to 91.38 per dollar on Friday, bouncing off an earlier low of 92.41, but is down 3.9% so far for the week and 23% year to date, making it one of the world's worst performing currencies. It's only just better off than the Turkish lira , down 39% after damaging monetary policy that a new central bank governor is trying to reverse.

The Russian currency is trading around levels not seen since the end of February 2022, shortly after President Vladimir Putin ordered the invasion of Ukraine, a globally condemned action that has brought damaging sanctions raining down on the government and made it difficult to stabilize the ruble.

The currency has dropped roughly 10% since the June uprising by the Wagner Group, a paramilitary group led by Yevgeny Prigozhin, a dramatic series of events that raised questions over Putin's authority and the country's stability.

The ruble has moved past what First Deputy Prime Minister Andrey Belousov has referred to as the "comfortable zone" for the currency -- between 80 to 90 rubles per dollar. "It is comfortable for the budget, and for exporters and importers," he said, according to a report from Russian news agency Tass in mid June.

But Bank of Russia Gov. Elvira Nabiullina this week explained away the weakness, blaming "foreign trade" and higher budget spending.

"For us, any exchange rate is acceptable, we take it into account in making a decision on monetary policy," she said at a conference in St. Petersburg, according to Bloomberg. Brushing aside worries about financial stability risks, she said there is no "target" for the currency.

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Increasing financial instability and rising inflationary risks are likely unavoidable for Russia in coming months given the ruble's weakness, said Christopher Weafer, chief executive officer of Macro-Advisory Ltd., in emailed comments to MarketWatch.

"Since mid-March 2022, the central bank has full control of the ruble exchange rate. It works with the major export companies and with the Finance Ministry to 'manage currency flows,' but it determines where the exchange rate is on any given day," said Weafer.

Any and all commercial influence or independent market activity stopped in March 2022, shortly after Russia's invasion of Ukraine, he said. Throughout much of that year, the central bank's mandate was to get inflation to below 10% by year-end and low single digits in 2023. And part of that involved keeping the ruble close to 60 U.S. dollars, which helped steady import prices and other costs, he said.

He believes the central bank sees its job "done," with inflation down to 2.5% in May, after peaking at 18% in April 2022 and ending that year at 11.9%.

The ruble's recent bout of extra weakness has coincided with the annual budget review and 2024 expectations, so a continued shortfall in expected dollar-based export receipts leaves the government with just a few choices, he said. That is, spending cuts or additional taxes, neither are feasible, or another hit to the ruble to boost that converted export value of receipts, said Weafer.

Of course the central bank needs to watch for Russians losing confidence in the ruble and potential ATM runs, but for now, its priority is to balance the budget, he said.

If the oil receipts start to recover, the ruble will be allowed back to the low 80s vs. the dollar, but with no change it will stay in the 90 to 90 dollar range, while further weakness in those receipts will mean the ruble could drop to 100 vs the dollar, he said.

Oil is not working in the ruble's favor, though with the price of Brent crude down more than 10% so far this year as jitters around the global economy have grown.

Konstantin Sonin, Russian economist and professor at the University of Chicago Harris School of Public Policy, pointed out on Twitter that the ruble is more or less back to where it traded from 2014. The war caused a dramatic import fall that it outweighed anything else, but that is over, he said.

"What remains is continuing capital flight, decreasing budget revenues, both oil/gas and domestic taxes, declining real incomes, CB [central bank] reserves lost because of the war -- so the ruble doesn't have anywhere to go but down. Not necessarily as fast as in the last couple of months, though," he said.

Meanwhile, others say Russia could be dealing with much higher inflation than some believe:

-Barbara Kollmeyer

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07-07-23 0825ET

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