NEW YORK ( BBH FX Strategy) -- We do not expect today's outsized declines in Russian assets to be the start of a trend and would be inclined to take the recent moves as an opportunity to establish relative value trades within the emerging markets.
In the foreign currency space, we think the Russian Ruble (RUB) can outperform amongst high-beta currencies including the Indian rupee, Turkish lira and South African rand during this pullback in risk appetite. The key difference is the current account balance and oil prices, which are likely to remain supported by geopolitical tensions.
Moreover, the RUB should benefit in the short term from the gradual pricing out of the political risk premium and maybe even a reversal of some outflows as the country gets back to business as usual.
For the USD/RUB, the near-term target is the 200-day moving average of around 30 currently. After that are the retracement targets from the December-February drop around 30.1785, 30.5907, and 31.0028. Much will depend on euro-zone developments.In the medium to longer term, however, Russia should continue to trade at a significant discount to its EM peers as fiscal spending catches up with Putin and the political transition approaches. Unlike a usual electoral cycle in EM, Putin will have to continue fiscal outlays to prevent the erosion of his fragile support base even after the electoral victory. This time around, he relied on spending promises for doctors, teachers, police and the military, amongst others. In an interview with Reuters, Finance Minister Anton Siluanov calculated the new fiscal costs to be as much as 2% of GDP each year, though other sources put it at as much as 3%. Russia's budget arithmetic is essentially conducted on the simple balance between spending and oil prices. For example, the oil price required to balance the budget increased from $34 a barrel in 2007 to $117 this year given the increased size of fiscal spending. Benchmark Russian Urals crude is currently trading around $122. If Iran-Israel tensions ease, one would expect Urals to move below the breakeven $117, which would clearly be negative for Russia.