Russia: All Good Things...

Around the Curve

Russia: All Good Things...

Russia remains in a good spot. How much of the good news is already baked into the currency?


Back in 2014, the oil price collapse and U.S. sanctions shocked Russian markets. The dollar-ruble cross went from 35 to 85 rubles to the U.S. dollar and dollar bond spreads widened from 200 to over 550 basis point (bps). The Russian authorities responded forcefully with tighter monetary and fiscal policy which encouraged a swift rebalancing of the economy. Five years later, Russia stands out as one of the few major emerging markets (EM) boasting both fiscal and current account surpluses. The ruble has been the best performing EM currency year to date on a total return basis, and local-currency bond yields are plumbing new lows. But as is always the case in markets, the question is not where we've been but where we're headed. There are growing signs that future economic policy will shift focus to the potential detriment of asset prices. Let's focus briefly on policy rates and balance of payments dynamics.

The Central Bank of Russia (CBR) has built up its credibility substantially as a result of its reactions to the 2014 crisis. The key rate was hiked to 17% in late 2014, reduced to a more “normal” 11% in 2016, and monetary easing since then has been extremely gradual with the policy rate still standing at a high 7%. The yield pickup relative to other Ems has supported the ruble despite geopolitical noise throughout the period. Monetary policy may be about to become a lot less restrictive with inflation falling below the 4% target; 2020 will likely be another benign inflation year given favorable base effects related to this year's value added tax hikes. The CBR now has room to engage in a substantial easing cycle with policy rates likely to approach 5.5% by next summer. Monetary easing will eventually have a favorable impact on growth, but on a first-order basis may erode the ruble's yield support.

Balance of payment dynamics trends have also started to reverse. After a brutal decline in 2014-15, imports seem to have bottomed. Non-energy exports improved significantly starting in mid-2016, but have rolled over given weakness in its main export market, Europe. The price of Russia's main export, energy, remains challenged as global demand concerns outweigh OPEC supply cuts. Income outflows are set to pick up as Russian companies switch from using cash to repair balance sheets and restart dividend payments. As a result, analysts expect the current account to erode from an impressive 7% of gross domestic product to closer to 4% by 2020.

However, Russia remains in a good spot. The sovereign debt has room to draw on fiscal savings to invest in infrastructure and boost growth. Better loan affordability has ended years of painful deleveraging. The central bank has ample reserves in the event of another crisis. It's more of a question of how much of the good news is already baked into the currency and what the future holds.


The Russian ruble (ruble) is the currency of the Russian Federation (Russia).

A spread is the difference in yield between two different types of fixed income securities with similar maturities.

One basis point (bps) equals one one-hundredth of one percentage point.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.

current account balance (of payments) summarizes the flow of goods, services, income and transfer payments into and out of a country

current account deficit is when a country's government, businesses and individuals import more goods, services and capital than they export.

current account surplus is when a country's government, businesses and individuals export more goods, services and capital than they import.


Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.