RUB/USD may surge above 65 due to the new currency regulations. The new law will free exporting companies under the sanctions from mandatory FX revenue repatriation, Raiffeisen Bank analysts say.

This easing of currency controls for those Russian exporters that were affected by the western sanctions could lead to more capital fight and RUB depreciation to at least 65 RUB/USD over the next 12 months. Raiffeisen Bank analysts published a report with the forecast earlier this week.

On 12 July,  Russia’s parliament, passed amendments that would ease currency controls. The law also envisages no more fines for the sanctioned Russian exporters non-repatriating their foreign currency revenues. “These companies are under sanctions and cannot return their foreign currency revenues. Punishing them for that would not be appropriate.”, Russian Deputy Finance Minister Alexey Moiseev was quoted as saying at the beginning of July.

The informal requirement for private companies to sell foreign currency proceeds in the local market was first introduced back in December 2014 when RUB plummeted to  80 RUB/USD. The market was in turmoil and it was exporting companies that had to step in to tame volatility with president Putin reportedly calling exporters personally. Shortly after that the government issued regulations for state companies to bring their net FX positions to the level of 1 October 2014 by 1 March 2015.

Rosneft effect

Before the controls were introduced, Russian exporters had kept a significant portion of their export revenues aboard, thus boosting their FX assets, and consequently, capital flight. As a result, export of capital through the financial account at times was higher than Russia’s current account balance. In 2013, capital export accounted for USD 46 bn or 11 bn more that the current account balance of USD 35 bn. The difference  was covered by Central Bank selling foreign currency according to the “technical corridors” in place at the time.

Raiffeisen Bank analysts note that sanctions directly affect only Rosneft which is only one of the five major state exported companies. Rosneft export revenues reached USD 64.3 bn in 2017 and, according to analysts, the company has insufficient rouble earnings to cover its operating rouble expenses (production costs and taxes).

Raiffeisen Bank  estimates the company will have to sell around 60 per cent of its FX revenue to buy RUB assuming it does not attract any local currency debt to cover its domestic expenses. This means that  supply of FX liquidity in the local FX market will decline by USD 25.7 – 64.3 bn over the next twelve months. The lower bound of this estimate is based on the assumption that Rosneft uses its revenues to cover expenses. The upper bound assumes that the company borrows in the local market.

Analysts forecast the current account surplus could reach about USD 100 bn in 2018 assuming the average Brent price of USD 75 and the average RUB/USD rate of 63. Finance Ministry’s currency interventions would mop up about USD 70–75 bn in FX liquidity (the ministry purchases foreign currency from oil proceeds sold at above USD 40 and keeps this currency as reserve). The country’s external debt should reduce due to ‘external conditions’, and the cancellation of foreign currency revenue repatriation  would spur capital flight and exacerbate FX liquidity deficit in the domestic market. This  should also lead to further RUB weakening, Raiffeisen Bank adds. They see the new equilibrium exchange rate at above 65 RUB/USD with the Brent price staying at USD 75 at the end of 2018. RUB may depreciate even more if Rosneft moves a larger revenue portion abroad. RUB/USD could rise to as high as  70, Raiffeisen Bank analyst Denis Poryvai told RBC.

At the same time, there are much more powerful factors impacting the rouble rate than currency controls easing. These include the Central Bank’s policies and the balance of payment, says Sergey Pukhov, a leading expert from the Higher School of Economics’ development centre. “There are more powerful factors, i.e. the oil price, sanctions, capital flight, currency purchases by the Finance Ministry and a whole bunch of other things affecting the exchange rate much stronger than the new bill cancelling mandatory repatriation”, he explains. Another expert, Yegor Susin from Gazprombank, notes a large part of the currency revenue is absorbed by the Finance Ministry one way or another, according to the so-called budget rule. He believes the change in revenue repatriation regulations for exporters will not be of any systemic importance for the RUB rate. A temporary reaction we can see is likely to be just an emotional reaction of the market, he concludes.