The pain trade in the Sochi Olympics has been pulling for the Russian hockey team (who was eliminated today.  As Dick Enberg would say “Oh my!”) but the pain trade in the currency markets may in fact be the Russian Ruble which today has fallen to all-time lows against the Euro and dancing near worst of the crisis (Feb 09) and all-time lows. 

Russian RubleRussian economic trends are not good.  The IP data was weak earlier this week, and today we saw real wage growth falling to lowest levels since ’09.  The economic Ministry recently downgraded 2014 growth and consensus overall is somewhere around 1.1.-1.5% growth.  This would put Russia in line for slowest GDP since 2009 on an annual basis.

Ruble weakness is hurting the consumer as Dollar incomes(often how they are benchmarked) were -8% in January.  This won’t help the broader consumption trend which until recently has been VERY resilient.  Ruble weakness however also helps import substitution and serves as a boost to exports.  Both of these trends are not lost on the CBR and MinFin.

The Ruble is -8% YTD and -20% y/y which doesn’t jive with fundamentals.  First of all at $110/bbl Brent is holding up and near 5yr average.  At this level Russia is adding significant reserves to their balance sheet. 

Sentiment on Ruble remains weak and this will weigh on prices but at these levels this move is overdone.  The CBR will not intervene because they are less geared towards growth than they are inflation.  Lack of structural reforms in Russia is the other reason why investors are bearish on Ruble.  With oil having held so strong and growth being so anemic investors draw a conclusion that says economic malaise will remain even in better times for commodities.

But that’s just it.  Commodities are rallying and oil demand remains sup[risingly resilient.  Russia is traded like other current account deficit countries which is it not.  Making a play on Russia in Ruble terms will be fruitful on a 6m – 1yr basis.


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