The prospect of a victory for Joe Biden in the US election has weighed on the rouble for months and its fortunes now appear more closely tethered to the White House contest in two weeks’ time than Russia’s economic health.
The rouble enjoyed a moment in the sun after Donald Trump’s 2016 US election victory, helped by the Republican president’s congenial relations with counterpart Vladimir Putin.
Low debt levels, as well as prudent monetary and fiscal policies, have protected the currency from some of the wild swings suffered by its emerging market peers from Turkey to South Africa for much of the recent period.
But as Democratic candidate Biden has pulled ahead of Trump in the polls since June, focus has turned to a new administration’s likely relations with other global powers, including greater friction between Washington and Moscow.
That risk, combined with angst about Covid-19’s spread in Russia and lower oil prices, has contributed to the rouble tumbling around 9% against the dollar in the past three months, making it one of emerging markets’ worst-performing currencies. It is now trading at around 77 against the dollar.
While the weakness has been a boon for exporters and the budget, it may hamper the ability of the central bank this month to continue easing monetary policy to support the Covid-ravaged economy.
The central bank declined to comment, citing its week of silence before its board meeting on Friday, where it is widely expected to keep the key rate on hold.
“If there wasn’t geopolitical risk in the currency, we’d probably be closer to 70, or even lower,” said Blaise Antin, head of emerging market sovereign research at TCW. “That’s reflective of the investor concern that’s out there and that concern isn’t going to go away on Nov. 4.
“Even if Biden wins, there’s going to be considerable uncertainty about what his policy mix will be.”
The currency’s discount to other commodity peers has widened in the past three months, noted ING’s Dmitry Dolgin.
The sanctions risk has hit portfolio flows into the local state debt (OFZ), which suffered outflows of $600 million in the third quarter after raking in $2.1bn in the second quarter.
Further outflows could follow in case of a Democratic victory, Dolgin said.
Foreigners hold around 29% of the local bonds and restrictions on their trading are viewed as a potential target in the event of renewed US or international sanctions.
Stocks have lagged other emerging markets since polls began to shift towards Biden and also suffered outflows, adding to pressure on the currency, while foreign direct investment was net negative in the most recent first quarter data.
Russia is not the only country that could find itself in more troubled waters in the event of a Biden win, with Turkey, Brazil and Saudi Arabia also expected to face more challenging times.
Some analysts and investors feel the rouble’s slide makes it look cheap based on fundamentals. They point to low debt levels by international standards and a recovering economy – the government has ruled out a second lockdown.
“The rouble screens as being amongst the cheapest currencies globally right now so that’s for us the best indication that the risk premium is too much,” said Saad Siddiqui at JPMorgan.
The rouble also enjoys relative insulation from low oil prices by the fiscal rule, which redirects oil revenues to the National Wealth Fund if crude prices top $42.4 per barrel, a system designed to shield reserves and the economy from price swings for Russia’s main export.
Although the current account suffered its weakest second and third quarters since 2013 due to low oil prices and output reductions, OPEC cuts are anticipated to lessen into next year and some analysts are positive on oil’s outlook.
Most investors are braced for the likelihood of renewed sanctions if Biden sweeps to power.
The Russian government’s ties to Belarus leader Alexander Lukashenko, who won a disputed presidential election in August and its alleged poisoning of opposition leader Alexey Navalny may draw Biden’s ire.
Biden’s campaign did not immediately respond to a request for comment.
He has long maintained a tough stance towards Putin’s government and was vice president when the US enacted harsher sanctions on Russia’s financial, energy and defence sectors as punishment for the 2014 annexation of Crimea.
While that helped inflict hefty losses on the rouble, investors feel some of the risk of testier relations this time may already be priced in.
“Biden’s focus will be first on Russia, which means that there is a higher probability of having more stringent sanctions,” said Nikolay Markov, senior economist at Pictet Asset Management.
“But there shouldn’t be a significant decline in the rouble, unless the other main risk materialises, which is the pandemic getting out of control.”
And the rouble could yet receive a boost if Trump won on Nov. 3.
“If there’s a Trump win, it will be a buying opportunity,” said Markov. “He’ll be much less stringent on Russia.”