The market does not believe in a long strong ruble. What does this mean for an investor

The main thing in the material:

• The ruble has strengthened by 16% in two months, but the market does not see this as a sign of steady economic growth.
• Analysts have noticed a recurring pattern: before periods of turbulence, the ruble often looks stronger than the fundamental conditions allow.
• The exchange rate now depends not only on commodity prices, but also on the Central Bank's rate, capital restrictions, imports, and the behavior of exporters.
• Analysts do not consider a sharp currency shock to be the most likely scenario for the ruble, but a prolonged mild devaluation — a gradual weakening of the exchange rate without panic in the market.
• In the new currency system, the investor's strategy is based less and less on guessing the dollar exchange rate and more and more on liquidity, diversification, real assets and the ability to maintain the purchasing power of capital. The beginning of the form

Recently, the exchange rate of the national currency has noticeably strengthened — the dollar is trading around 71 rubles, which is significantly lower than the levels to which the market has become accustomed in recent years. This creates a sense of relative financial stability: it seems that the pace of price growth is slowing down, currency risk is receding, and the ruble is regaining its status as a strong currency. However, more and more analysts are looking at the situation cautiously. The current strong ruble is largely based not on the acceleration of the economy, but on a combination of high interest rates, expensive loans and a slow investment cycle. Therefore, current sustainability is not perceived by the market as a new long-term norm. If a series of currency shocks does not occur in the coming years, but a period of slow devaluation sets in, then Izvestia figured out how an investor can protect capital.

A strong ruble before turbulence

There is a recurring pattern in the Russian economy: before major crises, the ruble often looked more stable than the fundamental conditions of the economy allowed. This was the case before the 1998 default, at the beginning of the 2008 crisis, and in some periods in 2022. But this does not mean that the ruble acts as a predictor. Rather, the foreign exchange market is one of the first to reflect the fragility of the system — reacting to the movement of capital, the value of money, export earnings and domestic demand.

Therefore, periods of an outwardly calm course often coincide with the accumulation of internal imbalances and a cooling economy. When the government tries to stabilize the financial system through tight monetary policy, loans become more expensive, businesses shorten investment cycles and reduce import purchases, and the population begins to save and save. In such a situation, the demand for foreign currency is temporarily suppressed, and the ruble is strengthening as a result of a decrease in economic activity.

Analysts have a feeling of deja vu about what is happening in the economy right now, as the ruble looks much stronger than many expected a few months ago. Formally, this looks like a sign of stability, but it is important for the market to what extent such a model is able to persist after the mitigation of the PREP.

The ruble exchange rate in Russia has long ceased to be just a market indicator. This is the most understandable indicator for the population. People may not keep track of the money supply, budget deficit, or export structure, but almost everyone is interested in the dollar exchange rate. Therefore, in commodity—based economies, the foreign exchange market almost always becomes a political tool, especially during periods when the economy is slowing down and it is important for the state to maintain a sense of financial stability.

How oil and the ruble diverged

Historically, the Russian currency has been very sensitive to oil prices, as oil and gas exports form a significant part of the foreign exchange flow. However, the current market situation is more complicated. The high rate, restrictions on capital movements, and cooling domestic demand weaken the ruble's dependence on fluctuations in the cost of raw materials. Additionally, through the budget rule and currency transactions, the state partially smooths out the impact of oil prices on the exchange rate (we wrote here how it works).

Therefore, even a decrease in the cost of oil will not necessarily lead to an immediate weakening of the ruble. Export earnings arrive in the country with a time lag, so the exchange rate today reflects the higher energy prices of the past months. At the same time, it is not so much the fact of the decline in oil prices that is important for the exchange rate, as the duration of the period of cheap oil and its impact on export currency flows. In other words, the connection between the barrel and the ruble has not disappeared, but has become less direct.

Pressure on the ruble may increase with the simultaneous influence of several factors at once — softening of the DKP, falling oil revenues, and rising imports. Then the system is likely to switch to a mild devaluation mode — not a sharp currency shock, but a prolonged weakening of the exchange rate. This is the most realistic scenario that will avoid panic among the population and at the same time support exporters and help the budget.

At the same time, hidden devaluation is already underway in many product segments — if you look not at the dollar exchange rate, but at the entire cost of living contour. Formally, the ruble may be strengthening, but the real costs of access to goods and services continue to rise. Logistics, international payments, imported components, and machinery are becoming more expensive. Businesses place increased currency risks in prices because they are not sure of the stability of the current exchange rate and have to take into account difficulties with supplies and settlements.

As a result, there is a gap between the rate on the scoreboard and the actual costs. For the consumer, it looks like this: the dollar is formally getting cheaper, but trips, electronics, cars, or foreign subscriptions are not becoming noticeably more affordable. Therefore, the market is increasingly looking not only at the ruble exchange rate, but at how the real purchasing power of money is changing.

The corporate sector perceives the current exchange rate more as a temporary anomaly of liquidity. Fundamental constraints have not disappeared: the economy is still dependent on commodity exports, the budget is sensitive to the exchange rate, and capital flows remain limited. Moreover, an excessively strong ruble is gradually starting to work against the budget system itself — the lower the dollar exchange rate, the less ruble revenues the state receives from export earnings.

What should an investor do?

Today, Russia has developed a new currency architecture — more rigid, less liquid, and more dependent on government decisions. The main mistake of an investor now is to turn the entire strategy into a bet on the ruble exchange rate. The logic of "the dollar will still be 90-100" seemed almost obvious six months ago: the ruble looked too strong, and substitute bonds and foreign exchange instruments made it possible to simultaneously receive coupon income and earn on a future revaluation of the exchange rate. Many investors assumed that the weakening of the ruble was only a matter of time.

But the market has shown how dangerous linear scenarios are — even if the exchange rate seems abnormal, this does not mean that the reversal will happen quickly. The rigid DKP kept the course, and the high rate turned deposits, floaters and money market instruments into the main magnet for capital within the country.

Moreover, after 2022, the very logic of currency protection has become more complicated. Previously, an investor could buy dollar assets and hedge the risk of a weakening ruble. Today, the dollar and the euro are no longer free and infrastructurally neutral instruments for Russia. And the yuan, despite its growing role in foreign trade, is still not a fully freely convertible currency. However, as the interest rate decreases, some of the capital may gradually withdraw from ruble-denominated instruments, while the demand for foreign currency savings and assets related to foreign exchange earnings may increase.

In the current situation, investors' focus is shifting towards a sustainable strategy of preserving cash flow and purchasing power of capital. Against this background, there is a growing interest in physical gold, exporters with foreign exchange earnings and dividend companies that can survive long cycles of mild devaluation. Indeed, in an environment where the gradual weakening of the ruble and rising costs continue (through higher prices for imports, international payments and access to external infrastructure), the winner is not the one who guessed the dollar exchange rate, but the one who retained liquidity, diversification and the ability to adapt to changing rules.

The theses contained in the text are not an investment recommendation, but the opinion of the editors.