Russian Ruble Risks Volatility Spike Despite Oil Prices Rally

The Russian ruble has continued its underperformance amid economic woes and lack of confidence in the country’s policymakers.

A year after the Russian ruble was making headlines with record bouts of volatility just after being free floated by the Bank of Russia, the currency is taking it on the chin once again. While oil prices have been slumping in the weeks before Christmas, the market for the commodity has taken a breather after Brent and WTI crude leveled in terms of nominal price last week.

In recent days oil prices have been rallying, but this time the Russian ruble is not following up with a rally of its own. Several market analysts continue citing the crude oil price as the key factor behind the move despite the decoupling of the market in recent days, while others are pointing towards lack of liquidity.

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That said, the key reason behind the move is not what is transpiring on the commodities markets. The central bank of Russia has been actively engaging in verbal intervention in recent days, as the country’s oil producers need a boost to remain competitive on the international markets.

USD/RUB, Chart, Russian ruble
Weekly chart of the USD/RUB exchange rate, Source: NetDania

A depreciation of the Russian ruble is reducing the operational costs of Russian oil and gas companies at a time when they desperately need a competitive boost in order to remain in business.

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While today foreign exchange brokers are not looking at the USD/RUB and the EUR/RUB pairs as sources of extreme risk, as was the case a year ago when the currency was making 5 to 10 per cent swings on a daily basis, it is worth pointing out that future risks remain.

In a recent comment on the value of the local currency, Bank of Russia officials have stated that its current value is close to equilibrium. At the same time inflation in the country for 2015 is likely to come out at close to 13 per cent.

With central bank officials stating that inflation is likely to move lower in the near future, they have put rate cut speculations on the table. Just as was obvious a year ago, the dramatic rise in interest rates has stifled the real economy and a deep and protracted recession is now warranted.

Analysts from Barclays are anticipating the first rate cuts by the Bank of Russia to begin in the first quarter of 2016. This could bring additional turmoil to the financial markets as the Russian ruble’s attractiveness continues to diminish.

For foreign exchange brokers, this means that they should remain vigilant when looking at ruble crosses as the risks for increased volatility will continue to be present, regardless of oil prices.

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