May Ruble/FX Flows

The ruble looks more or less balanced and is likely to trade sideways in May barring further geopolitical developments. In April, the ruble was quite volatile. It tumbled to USD/RUB 77-78 amid the escalation in geopolitical tensions related to the situation in Eastern Ukraine as new US sanctions loomed. However, the sanctions turned out milder than many had feared and geopolitical tensions have eased somewhat over the last two weeks. Moreover, President Putin barely touched on geopolitics in his annual address to the Federal Assembly, while Russia recently ordered its troops back from regions along its southern and western borders following the completion of training exercises. There have also been reports that a Putin-Biden summit may take place, possibly on June 15-16. All of this has helped the ruble to recover to 74-75.Still, the recent geopolitical tensions have not been fully priced out of the ruble, which has continued to underperform - while most of its EM peers strengthened 2-4% versus the dollar in April, it gained only 1%. With this in mind, we think the ruble could be well supported in May if the geopolitical backdrop further improves, for example if the Putin-Biden summit is confirmed.Another supportive factor for the ruble could be planned investments from the NWF that President Putin mentioned in his recent address. The eligible projects should be determined by May 1, so it is likely that the amount and timing of the investments will be announced soon. FX purchases under the budget rule have totaled $6.4 bln so far this year, and if oil prices remain high, they could come to about $30 bln for the full year. Usually, the purchased FX is transferred to the NWF only the year after the purchase is made. However, we think at least part of this FX could be transferred and then invested this year. The CBR will mirror these investments in the market, meaning it will likely reduce its FX purchases made under the fiscal rule (which currently total $110 mln per day) by $40-50 mln per day, which was the amount of additional FX sales seen in 4Q20 related to the NWF's purchase of stakes in Sber and Aeroflot. This could be perceived as effectively a temporary around $5/bbl hike in the base oil price (currently $43.3/bbl) in the fiscal rule.We estimate that this could theoretically cause the ruble to strengthen 2-3% versus the dollar. If the NWF investments are announced in May, this would have an immediate positive impact on the ruble, but most of the effect would likely be felt later this year when the CBR actually announces a reduction in FX purchases under the fiscal rule. On the other hand, flow-wise May will be rather challenging for the ruble. Starting May 12, FX purchases under the fiscal rule will stay almost unchanged at R186 bln for the month; however, due to there being fewer working days, purchases will rise from $110 mln to $140 mln per day. In addition, over the "non-working" holiday next week, the CBR is set to conduct purchases of $110 mln per day, as Russian financial markets will remain open and the CBR will be operating as usual. However, market liquidity will likely be thin and these FX purchases could weigh on the ruble. Furthermore, on the back of the recent ruble appreciation, retail investors have recently begun buying FX on net ahead of the long holiday. That said, when the ruble depreciated recently to 77-78, they were actively selling FX.Meanwhile, R560 bln in dividend payments are due in late May, including R72 bln from Novatek and R422 bln from Sber. We estimate that up to $3-4 bln of these payments could be converted into FX, including the $1.6 bln already due to holders of depositary receipts. We think these FX purchases could to a significant extent diminish the positive effect on the ruble from exporters' tax related FX sales at the month-end, which will be lower than in April and March due to modest profit tax payments and no EPT payments (which is paid only in March, April, July and October). We expect the dollar to recover globally in May despite the Fed's recent dovish tone. We expect US data to continue to surprise to the upside, which should compel the Fed to finally make a hawkish turn in May and particularly in June, when its economic forecasts will be updated. The key event to watch will be the US jobs report for April, due next Friday. Should the nonfarm payroll change exceed the current expectation of a 0.9 mln job additions - which could easily be the case considering the relatively low initial jobless claim numbers currently - this would likely push the UST 10y yield closer to 1.80% and trigger dollar appreciation, with the greenback possibly reaching 1.195 against the euro in May. On balance, we expect the ruble to hold steady at around 75 in May, as the positive effect from a potential further easing in geopolitical tensions and planned NWF investments will likely be offset by higher dividend-related demand for FX and a globally stronger dollar.