June Ruble/FX Flows. Following Biden-Putin Meeting Ruble Could Advance to 72 by end-June

Ruble looks set to firm moderately ahead of the Biden-Putin meeting, following which it could advance to 72.Since late April, the ruble has appreciated by more than 2%, supported by global dollar weakness, the oil price breaking above $70/bbl and an improving geopolitical backdrop. In particular, the US backed down from sanctions on the Nord Stream-2 pipeline operator, while a Biden-Putin summit has been confirmed. The ruble attempted to test 73 recently, but FX purchases related to the conversion of Sber dividends (around $1.2 bln should be paid to depositary receipt holders) have pushed it back closer to 73.5. Realized volatility has dropped significantly, and USD/RUB has been trading in a tight range of 73.1-73.8 over the last weeks. USD/RUB 3m implied volatility has fallen by more than 1 pp to 11.5% - its lowest level since the pandemic started. We expect the low volatility to continue until the Biden-Putin summit scheduled for June 16 in Geneva. Ahead of this key event for Russia investors, we do not expect positions to be significantly shuffled. Moreover, dividend-related FX demand should wane in the coming days, while the oil price appears set to remain elevated. These factors should all support the ruble and allow it to stabilize around 73 by mid-June, in our view. We think the reduced ruble volatility, combined with a potential 50 bp key rate hike by the CBR next week, should boost the ruble's carry trade attractiveness, protecting it from potential global dollar strength. The dollar could go on the advance should the US inflation reading for May (to be published on June 10) again surprise on the upside. The consensus is for 0.4%, while it could easily come in several tenths of a percentage point above that level given that the PMIs for May pointed to elevated inflationary pressure and lingering supply constraints. Although the inflation uptick will likely prove transitory, it would also reduce the Fed's tolerance for higher inflation in the future under its average inflation concept, adopted last August. Hence, higher inflation now, even if transitory, would mean the Fed would be eager to hike rates faster in several years' time, which should lead to higher longer-term rates and yields. So, should inflation surprise on the upside again, we would expect the FOMC to considerably raise its 2021 inflation forecast, while the majority of dots could point to several hikes in 2023. Against such a backdrop, we would expect 10y UST yields to settle above 1.70% and the dollar to strengthen globally, for example to 1.20 against the euro. In our view, the Biden-Putin summit on June 16 could ease the geopolitical tensions somewhat, which would open up a path for the ruble to strengthen to USD/RUB 72 by the end of the month. The two sides are likely to focus on strategic stability, including arms control and cyber security. US and Russian officials have already discussed these issues in recent weeks following cyberattacks on a US petroleum product pipeline and most recently on meat producer JBS. The US has blamed these attacks on Russia-related elements, not on the Russian authorities themselves, and the talks appear to have been constructive. Should a similarly positive atmosphere surround the upcoming summit, and especially should we see progress toward an agreement in the cybersecurity space, which President Putin has long been advocating, some investors' political risk perceptions could ease.Flow-wise, the situation looks set to be more challenging in June for the ruble compared to May, but it could find support if upcoming NWF investments into the economy are announced.We expect FX purchases under the fiscal rule to increase to R220 bln in June from R124 bln in May due to higher oil and gas prices and the fact that in May FX purchases were unexpectedly subdued likely due to one-off factors. In daily terms, FX purchases should climb by $50 mln to $140 mln. In May, NWF investments were discussed by the government, though there was no official announcement. According to media reports, up to R1.8 trln is up to be invested over three years (R600 bln or $8 bln annually) to build new roads and railways, develop hydrogen transportation, upgrade municipal infrastructure and modernize train cars in the St Petersburg metro. If these investments are officially announced in June, the CBR could reduce FX purchases under the fiscal rule by up to $30 mln daily ($8 bln annually) starting from July.Meanwhile, exporter tax payments should remain at around $10 bln in June, where they were in May, as a pickup in O&G tax and duty payments should be offset by a seasonally lower profit tax take. Exporters' dividends (the main payers are Severstal, Nornickel and Rosneft) will be quite high at $5 bln in June, we estimate, but the FX selling related to this will be almost fully offset by FX purchases due to the large share of foreign stockholders (including offshores companies) in these companies.