Emerging Markets November 05, 2020 / 03:33 pm UTC

The Ruble’s Biden Bounce

By Francesca Beausang

Bottom line: As we expected, the ruble has rallied to USD/RUB 77.64, after what seems to be an increasingly likely victory of Joe Biden in the U.S. Presidential elections. Despite Biden being hypothetically more hawkish on Russia than Donald Trump, the absence of allegations of Kremlin interference in the post-election analysis is supporting RUB after three months of losses, as is the recovery of the Brent oil price. However, we warn that in the medium-term, Biden’s green agenda, and a normalization of U.S. relations with Iran, increase RUB depreciation risks. 

Figure 1: USD/RUB Dips on Apparent Biden Victory

Source: Continuum Economics, Bloomberg

Because a ruble-negative Biden victory had already been priced in, RUB’s recovery is not that surprising, but it is also down to the rise in the Brent price above USD 40/bbl. The latter is driven by rumors that OPEC+, including Russia, is close to agreeing to extend their production cuts for another three months when they meet at the end of November, and potentially to add to them.

In the short-term, the ruble remains vulnerable to Trump’s legal challenges to the election outcome and to Biden adopting harsh anti-Russia rhetoric in the coming days. Trump contesting the results at the Supreme Court promotes safe-haven entry into USD and exit from the risky commodity currency that is the ruble. As for the anti-Russia rhetoric, it might not happen this month, but it is inevitable if Biden officially becomes President in January. While the announcement of sanctions would cause a kneejerk sell-off, the market would soon come around to the fact that the only sanctions with real bite, those on local government bond holders, will not happen. Furthermore, by January, any anti-Russian rhetoric is likely to coincide with improving risk-positive news on a COVID vaccine, which will lessen its effects. Altogether, we see the ruble appreciating to USD/RUB 72.00 by year-end and 69.00 by end-2021.

However, in the medium term, a Biden presidency does hold an indirect risk for RUB via its impact on oil. First, we see a risk for the ruble from a Biden-led U.S./Iran rapprochement, which would result in strict sanctions on Iranian oil exports being eased. Iran coming back on line would imply 2mn b/d of Iranian crude oil exports returning to the market. On the upside, Biden’s embrace of the Paris Agreement could mean the disappearance of some U.S. shale oil and gas. But in the medium term, a green swing by the U.S.—one of the biggest energy consumers in the world and a trendsetter in car manufacturing—will inevitably lead to slowing global demand for oil. The one limitation on this effect, which the Kremlin can hope for, comes from the likely Republican majority in the U.S. Senate. Indeed, with the Democrats constrained by a Republican Senate, it reduces their ability to pass a blockbuster green energy bill.

Conversely, we would note that the Trump Presidency coincided with mass support for the U.S. oil industry, through Washington’s withdrawal from the Paris Agreement, extremely lax environmental regulation, and sanctions against Iranian and Venezuelan oil and the Nord Stream 2 pipeline. Hence a 4mn b/d increase in U.S. oil production, which has led to a noticeable loss of oil and gas revenues for Russia. If Trump stays on, he has promised to maintain support for fossil fuels, all of which compete with Russian exports, as well as extremely loose regulation of the oil and gas sector, and the swift issuing of licenses to develop the Arctic shelf. In that perspective, both potential presidents could be said to have a ruble-negative impact in the medium term.

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Analyst Certification
I, Francesca Beausang, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.