Citi analyst who predicted ruble slump forecasts more weakness

A Citigroup Inc. model that predicted the recent slump in the ruble is indicating that more pain is in store for Russian markets, even after the central bank increased foreign currency sales.

“The risk premium embedded in the ruble-dollar exchange rate is still below previous highs, pointing to possible further short-term pressure,” Ivan Tchakarov, an analyst at Citi in Moscow wrote in an emailed note.

Tchakarov used the model in July to forecast that investor jitters about another round of sanctions against Russia could send the ruble plummeting to levels last seen during an oil-price crash in March. The currency was trading about 2 rubles short of that level on Tuesday.

A multitude of geopolitical risks has combined with a surge in Covid-19 cases to erode investor confidence in Russian assets. The ruble is the worst-performing currency among major emerging markets this month, plunging 7.1% in large part due to concern that the Kremlin will be hit by fresh sanctions.

The Bank of Russia said Tuesday it would increase foreign currency sales to $2 billion over the next three months, not enough to reverse the ruble’s slide but a move that could be seen as a signal of support for the embattled currency.

“The announcement should help the market start stabilizing, but we’re not out of the woods yet,” said Yury Tulinov, head of research at Rosbank PJSC in Moscow. “The volume isn’t decisive.”

The sales will total 2.9 billion rubles ($36 million) a day in October through December and “won’t have a significant impact on the domestic market,” according to the central bank statement.

The Bank of Russia says it doesn’t intervene to target the ruble rate since moving to a free-floating exchange rate in 2014. The additional sales are to convert proceeds from the sale of its stake in Sberbank PJSC.

Part of the latest selloff has been caused by investors taking out hedges against the ruble to protect overweight positions in Russian government bonds, Tulinov said. Foreigners own about 29% of the outstanding debt, with holdings worth the equivalent of about $37 billion, according to central bank data.

Upcoming dividend payments and volatility around the U.S. elections could put more pressure on the ruble, Citi’s Tchakarov said. Without the geopolitical risk premium, the currency would be trading at around 67 against the dollar, compared to 79 on Tuesday, according to his model.

“There isn’t a lot the Bank of Russia can do to address the weakening currency,” Tchakarov wrote. “The most likely immediate action would be to explicitly send a signal that the current rate-cutting cycle is over.”