Ruble on the Rebound

The Russian ruble is rebounding, outpacing all other world currencies against the dollar this year. The 20 percent recovery this month alone stands in stark contrast to last year, when U.S. officials smugly pointed to Russia’s plummeting currency as proof that Western sanctions against Moscow for meddling in Ukraine were working.

That doesn’t mean the sanctions no longer have teeth. But it does add another complication to Western leaders’ already difficult task of trying to forge a lasting peace in Ukraine.

Some analysts have ascribed the ruble’s upward march — it took almost 70 rubles to buy a dollar at the end of January, compared to 52 now — to the tenuous cease-fire agreement reached between Ukraine and Russian-backed separatists in February. Others see the recovery hinging on events outside of Ukraine: Rising oil prices could be giving the ruble a boost, since the Russian government is dependent on money coming in from the country’s state energy giants. And yet another theory is that the ruble is not really strengthening, but just recovering to a reasonable level after plummeting too far last year.

The dramatic turnaround has prompted some investors to scramble to get back in. Bond investors, who had steered clear of Russia, are now returning in droves, according to Bloomberg. The move is a little counterintuitive because bond yields have actually dropped as the ruble has gotten stronger, which means investors are demanding less of a premium to hold Russian bonds, as Russia seems like less of a risky bet.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said bond investors’ return to Russia could be driven more by managers who need to keep up with their competitors and benchmarks that recommend holding more Russian bonds.

“If you’re a bond fund manager and you’re underweight Russian bonds, you’re underperforming versus a benchmark,” Chandler said. “It’s purely driven by the need to perform to the benchmark.”

But that doesn’t necessarily mean longer-term investors will jump right back in.

“Others, particularly those who would have a physical stake in the market in commodities or consumer goods, might be much more cautious about moving money around,” said Elizabeth Rosenberg, a former Treasury Department sanctions official who is now a senior fellow at the Center for a New American Security.

Rosenberg also cautioned against viewing the success of sanctions or Russia’s economy through only its currency.

While the appreciating ruble is welcome news for Russians who want to travel abroad and buy foreign goods, it may not be the sign of brighter days quite yet for the overall economy. Russian growth has contracted almost 2 percent this year. And the Russian stock market — after rallying in the first six weeks of the year — has been trending downward since mid-February and dipped another 2 percent Tuesday. Finance Minister Anton Siluanov said Tuesday that sanctions and low oil prices pose long-term risks to Russia’s growth.

While oil prices have recovered somewhat, they’re still far away from the $100 a barrel that the Russian government budgeted for last year, or even the $70 a barrel Siluanov said they were hoping for this year. Russian oil sells at a slight discount to Brent crude, which traded around $58 a barrel Tuesday.

In fact, there’s one painful irony to the strengthening ruble: If the currency gains too much, it could cut into real earnings from oil exports. The weaker ruble actually insulated Moscow from the worst of the impact of falling crude prices, since oil is sold in dollars yet was converted to fistfuls of rubles to cover domestic spending. A stronger ruble means less real earning power per barrel.

But that’s not quite a concern yet — even after the recent rebound, the ruble is still down nearly 30 percent from a year ago. Chandler said he doesn’t see the ruble strengthening much more because the Ukraine conflict is far from over and energy prices remain well below historic levels.

“A bit more, I could see that, but a lot more? I doubt it,” said Chandler.

Still, the ruble’s recovery comes at a tricky time for European leaders who are already facing dissent in the ranks — namely from Greece — on sanctioning Russia. On a visit to Moscow last week, Greek Prime Minister Alexis Tsipras made clear that he disapproved of the West’s efforts to squeeze Moscow economically. “We need to leave behind this vicious cycle of sanctions,” Tsipras said after his meeting with Russian President Vladimir Putin.

But as European leaders struggle to hold together the fragile consensus on sanctions against Moscow, the ruble surge is giving some parts of the Russian economy a shot in the arm. Companies that borrowed in dollars, for instance, are likely breathing a sigh of relief, as their debts deflated a little bit as the ruble strengthened.

But whether or not it continues, the currency rally is unlikely to be enough to save the Russian economy, or Putin, from another round of sanctions.

Keith Johnson contributed to this article.

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