January Ruble/FX Flows

We expect the ruble to resume appreciating in January thanks to global risk-on and a stable geopolitical backdrop.The ruble firmed considerably in December, particularly in the first half of the month, and even broke below 73 temporarily. This was driven by a positive external backdrop (global dollar weakness and rising oil prices), as well as a declining geopolitical premium, which we estimate reached about 11% in mid-December.However, toward the year-end and in early January, the ruble was prevented from making further gains, despite Brent climbing above $55/bbl, after Russia was accused of engaging in mass cyber-attacks against US entities. This caused the ruble to stabilize near 74, with the geopolitical premium bumping up to 14-15%, a level last seen in early November ahead of the US elections. Nevertheless, we expect the ruble to resume appreciating this month. We think the recent global dollar appreciation stemming from a 20 bp rise in nominal and real longer-dated UST yields is unlikely to continue and that a dollar correction is more likely. This uptick in yields reflected fears of the Fed tightening policy earlier than expected in light of a potential inflation spike stemming from more fiscal stimulus now that the Democrats control the Senate.However, recently Fed officials said they would start to taper QE by the year-end only if the economy rebounds strongly in 2H21. Given a 140k decline in nonfarm payrolls in December and possible labor market weakness in 1Q21 amid the difficult virus situation, even a significant inflation spike in December and the coming months (the data is due today) would be unlikely to change the Fed's very dovish stance. The Fed will likely signal unchanged QE volumes for the foreseeable future at the January 27 FOMC meeting, which should cap UST yields around current levels.Meanwhile, Biden's new fiscal stimulus plan (scheduled for release on Thursday) could surprise to the upside and total several trillion dollars in light of the weak labor market and heated political tensions in the US. Against this backdrop, US inflation expectations could have further to rise, while real rates are likely to come under pressure, which should support riskier assets and weigh on the dollar. On the geopolitical front, we anticipate some stability. The domestic political situation in the US is tense, so we expect the new administration to focus on internal affairs rather than foreign relations once it takes charge on January 20. A lack of developments in US-Russian relations could be taken positively by markets, so the ruble's geopolitical premium could decline again. In fact, there is still a chance that relations between the two countries could head in a positive direction: we think talks might be launched to extend the strategic arms control agreement that expires in February. Against this backdrop, we expect the ruble to firm to 72 by end-January and to 70 by end-1Q21. Flow-wise, the backdrop for the ruble appears mixed. On the negative side, there will be no FX sales from the Finance Ministry under the budget rule or from the CBR. These totaled R145 bln in December, or $85 mln per day. The CBR exhausted its additional FX sales at the end of last year, while we expect the Finance Ministry's FX operations to move from R50 bln of FX sales in December to R20 bln of FX purchases this month, as Urals averaged $49.4/bbl in December, above the base price of $42.4 /bbl, even after adjusting for a more than 10% decline in oil production and exports stemming from the OPEC+ deal.Late this month, around $2 bln of Russian exporters' dividends could be converted into hard currency, with $0.5 bln of this sum involving payments to depositary receipt holders. However, these FX sales could be offset to a significant extent by exporter FX sales to finance the dividend payments.On a positive note for the ruble, MET payments will rise to about R400 bln this month from R330 bln in December, so FX offers from exporters should be quite strong. December saw a strong pickup in retail FX purchases related to the appreciating ruble and seasonal trends: people usually increase FX purchases in December ahead of the New Year holidays, with a subsequently hefty decrease in January. We expect this to happen this month as well.In summary, we think the increased FX offers from exporters and reduced retail FX demand will neutralize the absence of FX sales from the CBR and Finance Ministry, which in aggregate will have a neutral effect on the ruble.