Biden recently said, "if I’m elected president, Vladimir Putin will be confronted and we’ll impose serious costs on Russia." Yet, he has offered few specifics beyond promising to extend the New START nuclear arms control agreement and demand that Russia withdraw from Crimea. The markets would be naïve to assume that a President Biden would concurrently take revenge on Russia for paying the Taliban to kill Americans in Afghanistan, task the CIA with killing the Russian agents behind the bounties, send lethal aid to Ukraine to defend itself against Russian aggression and ratchet up sanctions against Nord Stream 2.
Former U.S. President Barack Obama came into office in 2008 with Biden as vice president seeking a reset with Russia, and in 2009, the U.S. abandoned a Pentagon plan to build a missile defense system in Europe that had long soured relations with Russia. Five years later, the reset was so successful that Russia felt comfortable enough to invade Crimea.
Markets have forgotten history, and expectations for a major change in U.S. foreign policy toward Russia caused foreign investors to liquidate RUB longs, especially local OFZ longs. In August, the non-resident share of local OFZ bonds fell from 30.6% in July to 29.9%, but this is still above January’s 28% share.
Beyond the fact that the above expectations are overblown, we have a constructive view on oil prices and a resulting expectation that Russia will avoid a 2020 current account deficit. We think these factors will support a ruble recovery in Q4.