Rouble trouble

Is the current exchange rate sustainable?

In my previous piece I looked at what determines the value of the rouble. Unsusprisingly I found that the exchange rate is set, when we control for inflation, mostly by the price of oil. This makes sense, as Russia’s main export is oil and gas.

Since then there has been some pretty aggressive action in the rouble markets. Here is today’s USD/RUB to get a sense.

The weird thing though is that the rouble has fallen at the same time as the price of oil has increased. This is the opposite what should have happened.

We can get some sense of this, by looking at a simple scatterplot of the Brent oil price against the USD/RUB.

Highlighted in orange is today’s oil price and today’s USD/RUB rate. The rest of the data is monthly averages since 2008.

Yet using the nominal dollar exchange rate is not ideal. The regression is an okay fit, but it looks a lot less tidy than the rouble real effective exchange rate (REER) regression we fitted last time.

Unfortunately, we do not have data for this month’s REER. It hasn’t been published yet. But we can use the USD/RUB price today to model what the REER roughly looks like. We can then add this to our previous regression.

Highlighted in orange is today’s oil price and a REER modelled from today’s USD/RUB rate.

What we see is that, for the past nearly 15 years, any time the REER has drifted this far off the regression line relative to the oil price it has not stayed there long. From a purely statistical point-of-view then, this REER does not look sustainable.

Another way of looking at this is in histogram space.

The present oil price/REER ratio is highlighted in orange. This is clearly a ‘tail event’.

How do we interpret this? There are only two possibilities: either the current Russian exchange rate is far too low relative to equilibirum or something fundamental has changed in the roubles markets.

Has something fundamental changed? Maybe. Some may point to the threats to ban Russia from SWIFT. But the EU has made clear that there will be carve-outs for energy payments. If there weren’t it is difficult to see how Europe would keep the lights on.

In theory, the Western powers could try to hit Russia hard on any non-energy export. In that case, there is a possibility that the rouble could shift to a lower equilibrium, but continue to track the oil price. But this might overestimate how large those other exports are. Here is a pie chart of all Russian export sectors worth over $150m annually.

Needless to say, the blue section is energy exports.

Around half of Russia’s trade is with the EU. Of which around 70% is energy. So, if the EU went all in and stamped out all Russian non-energy exports, then they could in theory wipe out 15% of Russia’s exports. It is arguable that this could lead to a lower equilibrium exchange rate.

Is this believable though? Is the EU really going to cut off all trade with Russia that is not energy-related? Or will the SWIFT ban end up being an attack on a few Russian banks?

If you think it is the latter, the rouble is deep into ‘buy’ territory and the further it falls, the more attractive it becomes.