Fed hike may increase capital outflows from Russia

A potential US rate hike in Sept. is likely to increase capital outflows from Russia and trigger depreciation and higher volatility of the ruble. CBR is forecasting USD 90bn in net private capital outflows in 2015, and external debt repayment is cited as the primary reason. As of March 2015, ST debt was USD49.3bn. 

RBC Capital markets expects the ruble to reach 58 and 56 in Q3 and Q4 this year and believes this moderate weakness for the rest of this year will largely be driven by US monetary policy and CBR balancing three goals - fighting inflation, spurring growth, and rebuilding FX reserves to cushion outflows. The first factor that will play a role in the ruble's moderate weakness is US monetary policy. 

Assuming USD90bn in outflows and ~5% for current account surplus over GDP in 2015, the current account surplus would be ~USD100bn. The differential between the two is USD10bn, and CBR has already bought ~USD6.5bn in reserves. This back of the hand calculation explains recent ruble weakness.The second factor likely to push RUB lower is uncertainty about CBR's policy stance, says RBC Capital markets. CBR is aiming to bring down inflation, while also supporting growth and rebuilding its FX reserves. 

However, accomplishment of one of these goals may come at the expense of another one. To support growth, a cautious pace for rate cuts is expected,  especially into September. This is despite CBR Governor Nabiullina's statement - "unlike the inflation peak, the trough of the economic recession is not yet passed" (Statement, Jun. 2015). The magnitude is expected to depend on inflation expectations and the level of exchange rate, adds RBC Capital markets.