A couple months back, I wrote on this blog that investors should look for a crescendo of selling to start buying the ruble. I am happy to say I think we have reached this point. As I sit here in Moscow, talking to the ordinary Russians on the street, I have the sense that now is the time.
The ruble hit 80 to the USD earlier in the week on a panic driven sell-off if I have ever seen one. If you didn’t want to get in then, how about now around 60? I still think it’s an undervalued currency. Let me tell you why.
First, I believe the Kremlin is looking for a way out of the crisis in Ukraine. There is a definite political premium built into the ruble trade. If this situation can be alleviated somewhat, then the ruble will rally. If the situation can be solved in a grand political bargain between Poroshenko in Ukraine, Putin in Moscow, and the EU in Brussels, then the ruble will explode higher. If sanctions are lifted, katy-bar-the-door. I believe Putin is looking for this solution. If you read between the blustery lines of his press conference, there is a deal to be made. Foreign Minister Lavrov even said recently that Ukrainian President Poroshenko is the best chance for peace in Ukraine. U.S. Secretary of State John Kerry has been saying that the sanctions could be lifted immediately if there is reason to do so. Is there a secret deal underway? Obama likes this type of drama, just look at his recent actions in Cuba. If Putin can find a way to save face and save his economy, it’s in the best interests of everyone. He is definitely starting to feel pressure from his internal surroundings. Even the Russian people are starting to ask questions.
Second, oil could be putting in a near-term bottom. Recent statements by OPEC and even the U.S. Energy Information Agency have indicated a mid-sixties handle for oil is realistic. Oil may overshoot on the downside but could very well stabilize in this range. That is a huge weight off the Russian economy. They can deal with an oil price here even if it will cause a lot of pain for the ordinary Russian. The Kremlin can muddle through, although it won’t be pretty. The lower ruble has actually been good for the federal government’s budget coffers as they sell oil in dollars. Moscow has enough money to loan to its favored corporations to get them through this sanction inspired liquidity squeeze, just look at their recent deal with Rosneft.
Lastly, the recent significant hike in interest rates has started to create somewhat of a bid for the Russian currency. Seventeen percent interest on short-term money is attracting some risk-takers and increasing demand. This is why you have seen the ruble break back through 60 and slowly strengthen. The central bank’s strategy of a combination of interest rate hikes, regulatory relief and active intervention seems to finally be working.
So the combination of the reasons above provide strong support to the ruble at these levels. You may see some technical consolidation here around 60 to the USD. However, this support could provide a launching point for the ruble if a political solution is found in Ukraine. That is why I am saying now is the time to buy the ruble.
L. Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Newsmax TV, and others. LToddWood.com