Ruble’s world-defying rally may be in last days as default looms

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The Russian ruble’s puzzling rally this month may be about to recede.

A wall of petrodollars, emergency capital controls and a mandate that exporters convert almost all their hard-currency revenue into rubles have all put one-way appreciation pressure on the currency. That has sent the onshore rate up as much as 71 percent this month from a record trough of beyond 121 per dollar in March.

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Yet it’s a rally that investors remain wary of as Russia’s invasion of Ukraine takes a toll on its own economy, while it steps ever closer to what could be its first foreign-debt default in a century. While the ruble has gone from one of the world’s worst-performing currencies to one of the best in a matter of weeks, some strategists say the Kremlin’s capital controls have kept the ruble artificially buoyed, meaning its exchange rate versus the dollar may not reflect its real-time spending power.

“A lot of this is just man-made currency strength,” said Brendan McKenna, a currency strategist at Wells Fargo Securities in New York. “If all these policy measures weren’t in place it would probably be at the 180-level based on the evolution of the conflict.

The ruble has outpaced every other major emerging-market currency in the past month, with its onshore rate climbing 42 percent. The next-best performer -- the Brazilian real -- only rose 6.2 percent.

The rally has been partly driven by Russian exporters converting most of their overseas earnings into rubles to comply with mandatory measures.

Yet some of those controls are easing, and as warmer summer months approach -- which would decrease demand for Russia’s energy exports -- the ruble’s gains could reverse, according to George Vaschenko, head of the Russian stock-market operations department at Freedom Finance.

Vaschenko sees the currency resuming declines to weaken to as much as 90 per dollar by May.

The currency’s relentless appreciation means fewer rubles for the budget for every barrel of oil the nation exports. It also creates complications for the central bank, which is considering deeper monetary easing in months after delivering an unexpected 300-basis-point rate cut to 17 percent earlier this month.

Without money being able to flow freely across borders, the partial removal of capital controls won’t hugely impact the ruble’s power, according to Cristian Maggio, the head of portfolio strategy for TD Securities.

“In the absence of real flows that skew the currency one direction or another, it is impossible to say where the ruble would be trading,” he said.

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