Russia has Turkish President Recep Tayyip Erdogan to thank for making its currency look attractive again.
One month after U.S. sanctions sent the ruble into a tailspin, the currency is now sitting on the only carry trade return in emerging markets for May. While rising oil prices have played a major role, so has the fact that rising political risks in major emerging markets like Turkey are making Russia look good by comparison.
Russian currency generates sole carry return among emerging markets
Russia typically competes with Turkey, and also South Africa, for investment because they are grouped together as the big three high-yielding currencies in the European time zone. But while the ruble is plagued by sanctions risk, it trumps the other two on fundamentals due to its conservative central bank, high real interest rates and a budget surplus.
“The ruble is behaving like a haven currency in our time zone right now,” said Inan Demir, an economist at Nomura International Plc. “The ruble is benefiting from the oil price trend, it is more insulated from the higher Treasury yields given that it doesn’t have external financing needs, and in contrast to the lira specifically it enjoys a credible central bank.”
The ruble is up about 0.8 percent this month despite a rally in the greenback that has pummeled emerging-market currencies including the lira. In April the ruble retreated 9.1 percent as the U.S. hit Russian companies and individuals with fresh sanctions.
Money managers at Goldman Sachs Asset Management and Aberdeen Standard Investments said in recent interviews they are buying the ruble because it has underperformed this year’s 16 percent surge in Brent crude, Russia’s main export earner.
“Both the lira and the ruble are plagued by geopolitical worries,” said Phoenix Kalen, a strategist at Societe Generale SA in London. “But the ruble is on the right side of the oil/commodities dynamic and possesses a much more credible, sensible and independent central bank.”
— With assistance by Benjamin Dow