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Deutsche Positive on Ruble
World Economy

Deutsche Positive on Ruble

Despite facing sanctions, falling oil prices and recession, the Russian ruble is the most undervalued currency in developing Europe according to Deutsche Bank.
“If crude is stable, I see room for the ruble to strengthen,” Gautam Kalani, a strategist at Deutsche Bank in London, said, RT reported.
The position uses data from the bank’s Behavioral Equilibrium Exchange Rate model which values a currency based on real exchange rates and economic fundamentals. The system was developed in 1999.
The bank’s median forecast will see the ruble up to 72 against US dollar by the end of the current year.
Deutsche Bank sees prospects for economic strength shoring up the ruble despite Russia’s battle with recession and western sanctions.
The German bank notes Russia is the only major emerging market that added reserves this year through February 19 with $379 billion of foreign currency reserves and a national current account surplus.
In addition, crude prices have been gradually recovering after Russia and Saudi Arabia agreed to freeze oil production at January levels.
US crude benchmark West Texas Intermediate has gained over 11% since mid-February to over $34 per barrel. Brent crude gained about six percent in the same period, trading at over $36 per barrel.
Around 45% of Russia’s revenue is backed by oil and gas. Falling crude prices and international sanctions contributed to the decline in the Russian ruble which has lost half its value since 2014, but has been steadily recovering.

 Aftershocks
Don’t expect the good optics of Russian disinflation to last long, Bloomberg reported.
While price growth probably eased in February to the slowest since October 2014, the shockwaves of the ruble’s collapse earlier this year are set to catch up with the six-month deceleration. UniCredit SpA, Promsvyazbank PJSC and Gazprombank OJSC say inflation will end the second quarter in double digits before a deeper slowdown sets in. Data due Friday or next week will show the annual consumer-price index slipped to 8.5% from 9.8% in January, according to the median of 14 estimates in a Bloomberg survey.
Resisting the pull of a weaker ruble is a challenge as businesses and consumers continue to adjust to the record devaluation in January. For the central bank, which is struggling to rein in inflation expectations with the economy in recession, which means a longer wait before it can resume monetary easing halted since July.
“Even though inflation is falling, most of it is a base effect because this time last year inflation was rising very sharply,” said Liza Ermolenko, a London-based analyst at Capital Economics Ltd. who predicts price growth at 11% at the end of the third quarter.

 Impact on Inflation
The central bank’s research and forecasting department estimates the ruble’s weakness in December-January weakness will contribute about 1.3 percentage points to inflation in the first quarter, while Deputy Finance Minister Maxim Oreshkin puts its cumulative impact this year at 2.5 percentage points.
Higher input prices led Russian service providers to raise their average tariffs during February, pushing the rate of inflation to a five-month high, according to a survey of the industry by Markit Economics. Among manufacturers, the pace of input price inflation was “sharp” in February as output costs continued to grow, Markit said.

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