Will New Investment in Russia Help the Ruble?

Russia and the ruble have endured a perfect storm of collapsed oil prices and sanctions from the West because of their annexation of Crimea and support of separatist rebels in Ukraine. The Forex response to sanctions was dramatic.

We expect to see a significant Forex response as sanctions on Russia worsen. Sanctions were increased on Russia’s energy sector as the civil war in Ukraine continues and a Malaysian commercial jet is shot down by a missile as it passed over eastern Ukraine. According to the Telegraph, UK,

The rebels in eastern Ukraine are widely believed to be receiving material support and sanctuary from the Russian Federation. The approach of the West has been to begin the process of integrating Ukraine into the EU and visit sanctions on the energy and financial sectors of Russia. The end result could be the loss of financing for many Russian energy projects.

The Ruble plummeted in response to these measures as well as when the bottom fell out of the oil market. Every suggestion of more oil output such as by Iran was bad for the Ruble.

Iran and the world powers have come to an agreement to curtail Iran’s nuclear ambitions. As a result sanctions will eventually be lifted and Iran will start exporting oil again. Iran has the world’s fourth largest crude oil reserves and second largest natural gas reserves. As Foreign Policy notes this is good for oil companies and bad for Russia. The prospect of more oil from Iran drives the Ruble downward.

But times might be changing for Russia and the Ruble with new Western investment. Bloomberg reports on Western investors pumping cash into Russia.

Even before the U.S. presidential election raised hopes of warmer ties with the Kremlin, some big Western companies were betting Russia’s economy will soon come out of the deep freeze.

Big retailers like Sweden’s Ikea Group and France’s Leroy Merlin SA have begun pumping billions of dollars in new stores and factories, counting on Russia’s consumers to start emerging from hibernation after two years of recession.

Ikea is putting $1.6 billion into new stores over the next five years or so. Leroy Merlin in September announced a 2-billion-euro plan to more than double the number of outlets in Russia over the same period. Pfizer Inc. is building a new drug factory, while Mars Inc. is expanding plants for chewing gum and pet food.

Thawing of relations between Russia and the West due to the new president may portend better times for Russia and the Ruble. Up until mid-2014 the Ruble traded at about 30 to the dollar. At the beginning of 2016 it had fallen to 80 to the dollar but has now recovered into the 65 range. The price of oil is not expected to recover for years if not decades due to a lackluster world economy but the West may tire of sanctions and cut deals with Russia in order to resume business as normal and present a united front in dealing with terrorism. We expect new investment in Russia to help the Ruble.