The Russian Ruble has been one of the best performing currencies of 2015, effectively bypassing the economic punishment levied by the west in an elaborate strategy that has seen strategic relationships grow more than falter.  Sanctions have created an environment whereby Russia must be more creative in the way it skirts the economic impact by forging more lasting relationships focused on the energy and defense establishments.  Cozying ties with existing American allies is one more indication that the soft power influence of the nation is only growing over time in relation to its heavily indebted foreign peers.  The Ruble has a long road to recovery, but the foundation has been laid for a massive rebound in Russia’s fortunes once the geopolitical fervor dies down.

The Fundamental Picture

The idea of isolating Russia from the global economy was the equivalent of financial warfare, declared to punish the nation for its perceived hostility towards Ukraine.  Whether or not it was justified, the reality was a situation which enabled Russia to expand its strategic connections and although a painful transition considering the nation’s GDP slipped to a -2.20% annualized pace, on a longer-term basis Russia is poised to capitalize on any global growth rebound.  A look at the country’s underlying fundamentals shows that Russia has strong factors underlying the economy, with unemployment at 5.60% and debt-to-GDP at a sustainable 17.92% versus indebted Western peers pushing nearly 100% or higher in some situations.  The government is deficit spending at the moment, but borrowing will not be a problem especially with vast reserves of natural resources to back the debt repayment and increasing cozy relations with Southern neighbor China.

The aggressiveness of sanctions has forced Russia, under the stewardship of Vladimir Putin to increasingly focus on fostering a strong connection with China to collaborate on multiple fronts, most notably energy. The deals inked to build overland pipelines stretching into China to deliver gas were the first of many economic pacts to be signed and overall, Russia is busy decreasing its dependency on Europe as the pressure over Ukraine increases. The recent St. Petersburg International Economic Forum made that point very clear.  Not only was Russia able to sign on the Greeks to the Turkish Stream pipeline that will stretch into Europe, effectively bypassing Ukraine, but the nation has proven that it is unwavering in its ability to be flexible in solutions to skirt problems. 

Aside from the notable deal with Greece, they Russians are also making increasing pivots towards Saudi Arabia with King Salman’s son visiting Putin in a recent state visit.  The two countries have announced plans to cooperate and collaborate on global energy investment projects after sanctions crippled technologies helping Russia to begin development in the arctic and horizontal shale drilling projects. Several big announcements have also been made regarding deals for advanced weapons and defense systems coupled with the deal for nuclear power reactors signed on the sidelines of the recent forum.  This is another sign that Putin has deftly managed to outperform the West despite the continued hostilities plaguing Ukraine.

The increasingly bellicose rhetoric from the West shows a lot of provocation but Russia is not backing down either in the face of economic and political threats as evidenced by Russia’s ability to handedly make new alliances and strategic relationships to further the nation’s economic interests. Influence has only grown, not waned under Putin and recent deals with Greece and Saudi Arabia further that point. Isolation would imply that Putin has no alliances or influence, both of which are untrue. China represents the greatest example after deals have been closed to clear oil transactions in Ruble and Yuan, undermining the dollars hegemony in oil price denomination. The transitional unseating of the dollar as a global reserve currency means the Ruble has a far greater distance to appreciate over time owing to its commodity export status. 

Although there were some headwinds for sure in the wake of sanctions, Russia managed to avert the worst case scenario owing to a number of factors contributing to its economic standing.  The Bank of Russia was instrumental in preventing the continued hemorrhaging of foreign currency reserves and a speculative run on the Ruble by raising interest rates to a record 17% before moderating and reducing the key rate four times this year alone.  Inflation still remains well above the target rate, but that has been the real damage emanating from sanctions due to restrictions on imported goods in a tit-for-tat strategy from the Kremlin.  If anything, sanctions on Russia have been hurting Europe more than Russia.  Although lowered rates might create more softness short-term, on a longer-term basis, the Ruble will likely keep improving.

The Technical Take

Since bottoming out in December, USDRUB has steadily declined after the Ruble lost more than half its value in 2014.  The Ruble has climbed approximately 7.25% against the US Dollar year-to-date. The performance ranks the Ruble amongst the best performing currencies of 2015, but the appreciation has not been as strong owing to the fact that the Bank of Russia continues to drop interest rates in an effort to alleviate financing conditions after steeply hiking rates to prevent a further speculative run against the Ruble. On a medium-to-longer term basis, the Ruble will likely continue to rise in value owing to the promising internal conditions however, external conditions could play a substantial role in influencing the direction of the currency. 

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Recently the currency pair has been on the rise following the latest interest rate hike, as the pair approaches resistance at 56.7317. A breach of this line might pave the way towards 62.0774 which would be a more substantial upside correction to the prevailing downtrend. The moving averages are not giving a strong indication at present considering all the noise and volatility of the last few months. Even though the 50-day moving average is crossing the 200-day moving average to the downside, the 200-day continues to trend higher giving a mixed signal and not a definitive sell-signal for the “death cross” formation. The relative strength index (RSI) is also not giving a definitive signal on the overbought area of the indicator.  Once it crosses the 80 threshold on a longer-term basis it will be a stronger bearish signal for the USDRUB pair. 

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A shortened time frame shows the pair channeling higher on the 2-hour candlestick chart following the move by the Central Bank to loosen monetary policy further after the dramatic tightening late last year. Still sitting in more medium term downtrend meaning the channel higher might be a great place to find an entry point near the top of the channel. Even though typically not a great place to enter if trading the channel, the more medium-term downtrend shows that the correction higher is at the upper bounds of a technical correction in the realm of 60-75%. However, a move lower from here and breakout to the downside from the channel could see another rapid round of appreciation for the Ruble especially with oil and gas prices still fairly flat for the last few months. A break below key support paves the way towards 51.6830 and potentially back below 50 towards the next support level at 49.0102.

Conclusion

Although the Russian economy remains under pressure, on the whole, the country has managed to deftly avoid economic catastrophe while building its international clout, in deference to Western sanctions. The strengthening fundamental outlook is bolstered by the vast reserves of natural resources stretching across Russia and increasing trade deals with Asia.  Although the domestic situation is difficult owing to exceedingly high inflation, the Bank of Russia has been working diligently with the use of monetary policy to get the economy back on track.  From a technical point of view, the USDRUB pair might have a little further room to appreciate in the near-term, however, on a longer-term basis the pair is likely to continue trending lower after last year’s steep devaluation. The road ahead is not easy, but the outlook is great for the Russian bear.