Do not trust Putin’s rouble exchange rate, say traders

Financial contracts will be priced at weaker offshore currency value after local rate was artificially inflated

CURRENCY traders are shunning Russia’s local rouble exchange rate over fears of its crumbling credibility in a further blow to the country’s economy.

Financial contracts will be priced in the weaker offshore exchange rate after the local rate was artificially inflated by capital controls, which were installed by the central bank to stop money rushing for the exit.

The Trade Association for the Emerging Markets recommends that traders make the switch when pricing certain derivative contracts from early next month, given the gap between the rouble’s exchange rate locally and abroad, according to Bloomberg.

It is another sign that investor trust in Vladimir Putin’s Russia is collapsing as businesses and traders shun the country en masse. Economists have warned that foreign investment into Russia will be permanently damaged by the Kremlin’s actions as businesses boycott it.

The rouble is trading weaker abroad but the gap between the two rates has narrowed. Refinitiv data suggests the local rate is at 69.4 per dollar, while it is 67.9 offshore, a 2pc difference.

Capital controls, measures to stop money leaving the country, have helped the rouble rebound rapidly after it crashed following Russia’s invasion of Ukraine. After halving in value against the dollar in the first weeks of the war, the rouble has clawed back all of its losses.

Scope Ratings analyst Levon Kameryan said the rouble’s “fortunes are increasingly disconnected from the health of the Russian economy”.

He said the recovery in the currency can be explained by inflows of money for energy and the central bank’s capital controls and higher interest rates.

“Efforts of the Central Bank of Russia to prevent capital flight through capital controls and higher interest rates, while they are working for now, come at a cost of tighter financial conditions,” Mr Kameryan said.

“We project Russia’s economic output to contract by at least 10pc this year, the steepest decline since 1994, and stagnate in 2023, knocking the economy back to levels last seen on the eve of the global financial crisis of 2008.”

On Monday, the Russian finance ministry admitted the country is facing a 12pc plunge in GDP this year, the largest slump since 1994 when its economy was adjusting to capitalism following the collapse of the Soviet Union.

New figures from the Kremlin yesterday suggested that Russian inflation eased for a second consecutive week as household demand is squeezed.

Prices increased by just 0.1pc in the seven days to May 6, levels not seen since early January, according to the country’s statistician. However, Moscow said the inflation rate is at 18pc compared to a year earlier.

It came as economists warned that imports into the country almost halved in March and will collapse further as it heads into recession.

The Kremlin has suspended the publication of trade data but figures

‘We project Russia’s economic output to contract by at least 10pc this year, the steepest decline since 1994’

from trading partners point to a 45pc plunge in March, according to Capital Economics.

Liam Peach, Russia economist at Capital Economics, said: “The slump in Russian imports in March is the first sign of a broader collapse in domestic demand due to Western sanctions and we think this slump will deepen in the second quarter.”

As the EU mulls an embargo on Russian oil, the Institute of International Finance said a ban would have a huge impact on the country’s exports. It predicted that a ban could cut Russian exports by $155bn (£126bn) over the next two years.

“The final impact over 2022-24 will largely depend on Russia’s ability to redirect exports,” said IIF economist Benjamin Hilgenstock.

The European Commission has put forward proposals for an oil embargo to ramp up the pressure on the Kremlin. However, a vote to ban Russian oil needs unanimous approval and has been delayed amid opposition from Hungary.