- US sanctions against Russia have caused chaos across Russian asset classes.
- The ruble is now the worst performing global currency in 2018.
- Stronger oil prices could provide support for the currency in the near term.
The Russian ruble plummeted by around 9% against the US dollar this week in the wake of sanctions against Russia.
But according to analyst Finn McLaughlin at Capital Economics, there are reasons to suggest Russia’s currency could recoup some of its losses.
The sanctions — imposed because of Russia’s alleged interference in the 2016 US election and general “malign activity” — have also sparked a meltdown across other Russian asset classes.
Russia’s stock index tanked by around 10% before a small rebound, while yields on Russian 10-year bonds have spiked from around 7.1% to 7.6%.
And as for the ruble, this week’s slide saw it overtake the Turkish lira and Argentinian peso as the worst performing currency in 2018.
However, McLaughlin notes this isn’t the first time sanctions have been imposed against Russia.
A similar situation occurred in 2014 following the annexation of Crimea, which saw the ruble decline but then recover.
McLaughlin also pointed to recent strength in oil prices, which should provide support given Russia’s currency closely tracks movements in oil prices.
This chart illustrates just how sharp this week’s divergence has been, from what was a strong correlation:
While the ruble has slumped, oil rose to its highest level of the year overnight to close above $US70 a barrel.
“On the face of it, this suggests that the ruble could regain some ground in the near term if oil prices remain high,” McLaughlin said.
However, the current forecast from Capital Economics that oil supply will outweigh demand in 2018, as US shale producers take advantage of higher prices to ramp up production.
And the supply surplus will continue into next year, with OPEC currently scheduled to relax its supply restrictions in September. So by the end of 2018, CE expect oil prices to fall back towards $US60 a barrel.
“As a result, even if sanctions are not tightened further and the ruble recovers some of its losses, we think there is only limited upside for the currency,” McLaughlin said.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.