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The ruble collapsed — the long haul

Рубль рухнул — всерьез и надолго

On 6 September, the ruble has experienced another “black Thursday”. In the course of trading, the Euro broke the mark of 80 rubles, the dollar — 69. The last time the Euro was worth 80 rubles on April 11, shortly after the imposition of U.S. sanctions against Russian companies, including UC Rusal Oleg Deripaska, and the dollar rose to 69 rubles were in April 2016.

As stated by first Vice Prime Minister-Minister of Finance Anton Siluanov, the ruble is undervalued because of the expectation of a new package of anti-Russian sanctions and instability in Turkey, Argentina and South Africa. However, such volatility should not long continue, Siluanov said at the Moscow financial forum.

Even more optimistically responded to the collapse of the Russian currency, economic development Minister Maxim Oreshkin. He recalled the anecdote about Brezhnev, who fled the cross, came the “second from end” and took the prize. The ruble does not apply to the weak currencies of developing countries, it looks better the Turkish Lira, Argentine peso, South African Rand, Brazilian real and Indian rupee, the Minister said. According to Oreshkin, long-term the ruble is simply no reasons for the weakening.

Experts see the situation less rosy. In their opinion, against the background of harsh anti-Russian rhetoric in the UK in connection with the case Skrobala significantly increased the chances of adoption of a new package of sanctions against Russia from the United States, which was previously postponed. Some analysts believe therefore, that the threat of sanctions will continue to weaken the ruble, and targets now seen the frontiers of 72 rubles per dollar and 84 rubles per Euro.

Recall, 6 November it became known that London will consider expanding sanctions against Moscow in connection with the new information in the case of the poisoning of a former agent of the GRU, Sergei Skripal and his daughter Julia. This was stated by the permanent representative of Britain to the UN, Karen pierce.

Following this, France, Germany, the United States and Canada issued a joint statement which extended a press-service of the government of Germany. They agreed with the conclusions of the London suspects in the case Skrobala are employees of the GRU.

It means Americans can speed up the process of tightening the sanctions screws. Earlier, the Republican majority leader in the Senate Mitch McConnell said that the upper chamber may consider a bill on new sanctions against Russia in October. Now, it is not excluded, consideration will be held in the near future.

Note, the draft law Republican Lindsey Graham and his colleagues, entitled “an Act to protect American security from the aggression of the Kremlin in 2018” requires a lock dollar payments of Russian banks, a ban on transactions of U.S. residents with a new Russian public debt, the establishment of a national center to combat Russian threat, asset search of Vladimir Putin and the possible recognition of Russia as “state sponsor of terrorism.”

In addition, in January, senators Marco Rubio and Chris van HOLLEN introduced the Senate bill “Protect elections from threats by designating red lines” (DETER). The authors also propose to oblige the White house to block funds of the largest Russian banks and energy companies, plus to expand sanctions against sovereign debt and derivatives in Russia.

Meanwhile, the Ministry of Finance continues to increase its foreign exchange reserves, planning to increase the volume of purchases of foreign currency from 7 September to 4 October in the framework of fiscal rules. This may put additional pressure on the ruble.

Now how are the prospects of the national currency, which will roll in the ruble?

— What is happening with the ruble — a clear result of the conduct of investors in connection with the news flow, — said the head of a direction “Finance and Economics” Institute of contemporary development Nikita Maslennikov. In a week we lost a billion dollars of our assets, which is very serious. But it would be too easy to dismiss the case Skrobala.

Of course, investors cling to the news. But smart players understand that the situation with sanctions will remain essentially unchanged. This applies, for example, possible ban on the operation of U.S. residents with a new Russian national debt. The idea was tested, but this does not mean that Washington will immediately give her the “green light”. The vote in the Senate is not ready, and the “Act on the protection of U.S. security from the aggression of the Kremlin” in need of serious edits, because in its current form is not ready for use in law enforcement.

Therefore, the situation with the ruble should look more deeply — not limited to a statement of the problem of sanctions. And this situation, I think, more disturbing than it seems at first glance.

“SP”: — Why do you think so?

— I would not trust that the volatility of the ruble will end soon. A couple of weeks ago I was supporter of this view. But now everything has changed, because going huge sales of assets in all emerging markets. This avalanche process of a panic exit from emerging markets hit Russia, and ruble.

For a while, we holed up and now the storm has come to us. Moreover, it has a market rule: if you have some time been out of trend, then the trend overtakes you with much greater force.

You can tell if you could get along with everyone in the three-point storm, then alone you will cover a six-point. This is what is happening now with Russia.

Now beginning to stabilize the situation in Argentina, in Turkey, the Central Bank clearly announced a hard-line monetary policy, and no outcries from the President Erdogan was not followed. In Pakistan and Malaysia declare debt problems, but they are not critical.

However, the calculations show that the withdrawal of capital from emerging markets now comparable to the rates in 1998 and 2008. That means emerging markets are under strong fight, and there are signs that the situation in the global financial sector begins to approach the scale of mass correction down. In 2008, I note that such a correction has led to the collapse of Lehman Brothers.

It is a prospect, in my opinion, is the main argument for intelligent investors, in favor of the withdrawal of assets from emerging economies. In the end, the selloff in emerging markets is off the charts, simultaneously covering Russia. And thickening over Russia sanctions the clouds just happened to coincide with this the total sale at the time.

“SP”: — How the situation will develop?

On 25-26 September scheduled meeting of the Federal open market Committee (FOMC) of the fed. Analysts expect the interest rate on Federal loan funds (federal funds rate) will be increased by another 0.25% – to the level of 2-2. 25% per annum. In this case, capital will begin to migrate towards the American market, and primarily from emerging markets.

Plus, investors are anxiously glancing at the Eurozone. There the position of the Italian banking system threatens to spiral out of control, and the current Italian government is quite capable to provoke a crisis in the country, which will spread to the whole of the EU. Eventually, the capital goes more and from Europe.

All these basic conditions form a high level of risk to Russian assets that has a direct impact on the ruble. I think in the next week, the Russian currency will remain under strong pressure — while CB is not defined with the position on monetary policy. But whatever it was, most likely, the fate of the ruble — a rate of 68-70 per dollar.

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