Why the ruble rally is on shaky ground

The Russian ruble has risen by almost 20% since the turn of the year. However, this rally is based on shaky foundations. A possible ceasefire will not suddenly eliminate high inflation and the negative effects of Western sanctions.

The start of the negotiations on a ceasefire in Ukraine are making themselves felt on the currency markets. However, this is not happening in the way you might think. A revival of the Ukrainian hryvnia still seems far away. The only positive is that the fall in the exchange rate after a 30% slide against the euro has been temporary. The Russian zloty has shot up by almost 20% since the turn of the year. Currency markets are already pointing to Russia as the big winner of the peace talks that are getting underway under pressure from US President Donald Trump.

Wanted: men
At first glance, it is understandable that the ruble is rising. Economically, the war is hurting Russia more and more. A large part of the male workforce has been called up as conscripts or has fled the country. Due to a shortage of personnel, Russian industry is only operating at around 80% despite a huge need for more equipment. If the fighting really does end, this could alleviate the shortage of personnel. However, the biggest problems currently facing the Russian economy will not disappear like snow in the sun with a ceasefire. Inflation in the country had already crept towards 10% around the turn of the year.

High interest rates gave the ruble no air
The perceived temperature of inflation was even higher. According to estimates by the Russian Central Bank (CBR), inflation has reached 16% in the minds of consumers. High inflation is one of the biggest enemies of a healthy economy. In an attempt to control the decline in purchasing power, the CBR has already raised the policy rate to 21%. Usually, a high policy rate is a tailwind for the local currency due to the attraction of foreign capital. But because the ruble is not freely tradable – and especially because of the prospect of inflation flaring up even further – the currency did not get a boost from the rising interest rates.

Will this be the winner of peace?
In theory, Russia can control high inflation with high interest rates and a transition to a normal economy. However, removing the impact of Western sanctions is much more difficult. Even if a ceasefire is reached, Europe will be very reluctant to enter into trade relations with Russia. Trump’s policy suggests that trading with the United States will come at a hefty price. It could well be that the euro and Europe – after the Ukrainian people, of course – have the most to gain from an end to the fighting. Rebuilding Ukraine could boost the continent’s economy. Moreover, a Europe that works together better will be less likely to become a plaything of international geopolitics in the future than it is now.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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