BNY Mellon: The RUB Safety Valve
BNY Mellon: The RUB Safety Valve
By Simon Derrick, Chief Currency Strategist, BNY Mellon
- RUB has provided a useful safety valve for Russian markets over past two and a bit decades
- Indications that Moscow also sees it this way
- Impact evident again this week
While significant moves in the RUB have been seen on a number of occasions over the past 12 months, they remain some way off the extremities seen in either 1998 or 2014. It’s worth considering the price action seen during those crises, as well as asking what has changed.
In 1998 the first shock hit the currency market on August 17 when the government decided to devalue the RUB. It then took less than three weeks for the crisis to reach its peak as concerns grew - correctly - of a default on domestic debt.
Following a decision to abandon the floating peg on September 2, the RUB halved in value against the USD over the course of the next four trading days.
Although significant aftershocks were felt over the remainder of the 1998, early September proved the peak of the currency crisis. In addition, the use of the RUB as a safety valve ensured a rapid recovery in the years afterward.
A similar pattern appeared in 2014. After the drain in Russia’s FX reserves during the autumn and criticism by President Putin, the Central Bank of Russia announced on November 10 that it would allow the RUB to trade freely.
From this point it took just over a month for the crisis to peak on December 16, when the central bank raised interest rates by 650 bps to 17% following an intraday 31% rally in the USD.
All the indications over the past 12 months are that Russia still intends to use the RUB as a safety valve to protect the economy and local markets from the worst impact of sanctions. Indeed, Economy Minister Maxim Oreshkin said this in April of last year. Moreover, it appears to be working given the performance of the MOEX.
It’s also arguable that this approach to the RUB is paying dividends in terms of reduced realized volatility. Moreover, it’s noticeable that after the initial rapid adjustment in the price, the RUB seems to find its new equilibrium point very quickly. This, in turn, presumably feeds back into a more stable environment for local markets.
Why does this matter now? On Wednesday Republican and Democratic senators in the US introduced a bill seeking to punish Russia for meddling in US elections and for its aggression in Ukraine by imposing sanctions on its banking, energy sector and foreign debt.
In response, Russia’s finance minister noted that the nation had the tools to shield its economy from possible new sanctions. While he didn’t mention the RUB by name, it definitely is part of the tool kit.
The point is a simple one: by stepping back from the market the Russian central bank has created an environment in which the RUB can act - as it should - as a safety valve for local markets and in which volatility is nothing like that seen during previous major periods of unrest.
At a time when risk sentiment globally is turning more negative this, at least, is a small positive.
In response, Russia’s finance minister noted that the nation had the tools to shield its economy from possible new sanctions. While he didn’t mention the RUB by name, it definitely is part of the tool kit.
The point is a simple one: by stepping back from the market the Russian central bank has created an environment in which the RUB can act - as it should - as a safety valve for local markets and in which volatility is nothing like that seen during previous major periods of unrest.
At a time when risk sentiment globally is turning more negative this, at least, is a small positive.