ITI Capital: We know what Rouble will do this summer!

USDRUB Summer outlook and short-term strategy

  • April was the last month of a traditionally positive period for the rouble and in May the Russian currency has weakened against the dollar due to a range of seasonal and fundamental factors, in line with our outlook published in late April
  • We believe that the volatility will not go away and even increase in the summer, starting from June, even if we leave aside the sanctions risks. The rouble has weakened in large part due to both global and local factors, which will be discussed in detail in this article
  • We highlighted three key local factors indicating further rouble weakness against the dollar: FX buying after dividend payments (July and August), a seasonal decrease in FX-revenues from exports and external debt payments. Clearly, the main external factor is US sanctions and, to a lesser extent, lower demand for risky assets in certain emerging (Turkey, Argentina, etc.) and developed markets (US and Europe). Against this background, Russia, as witnessed in May, is perceived as credit and fiscally reliable safe haven, a primary target for non-residents amid global recession
  • The rouble is expected to take the steepest dive in July and August
  • The rouble is traditionally doing terribly in August, even leaving aside the sanctions risks; as witnessed last year too. According to our forecasts, leaving aside local factors and global volatility, in June the rouble could weaken to 66 against the dollar, in July – to 66.5, and in August – to 67
  • Our conservative forecast provides insight into positive factors, including FX-sales by exporters for tax payments, in particular in July ($6–7 bln), and a further delay of US sanctions (which is unlikely, in our view) amid stronger demand for risk
  • Therefore during dividend season we recommend buying USDRUB at the very last week of the month ahead of FX-buying for dividend payment to foreign holders and sell USDRUB towards the third week of the month ahead of major tax payments and major FX-selling related to dividend payments

The main reasons behind potential decline in rouble against the US dollar this summer

 Main reasons behind potential decline in rouble against the US dollar chart

Source: ITI Capital, Bloomberg

Average seasonal RUBUSD performance for 10 yrs, %

Average seasonal RUBUSD performance for 10 yrs chart

Source: Bloomberg, ITI Capital

Local factors suggesting rouble’s drop:

  • Dividends season with a significant amount of RUBUSD conversion
  • MinFin interventions/FX-buying and low liquidity in the FX-market
  • Decrease in FX-export revenues
  • External debt payments

External factors suggesting rouble’s drop:

  • New sanctions against Russia
  • New sanctions against Turkey over S-400 deal
  • Geopolitical instability (trade wars, etc.)
  • Political crisis in Argentina

General factors suggesting rouble’s drop:

  • Synergy from tax and dividend payments
  • High oil prices amid seasonal demand for gasoline (refineries)
  • Sanctions delay
  • Prospects of trade agreements between the US and China

Local factors suggesting rouble’s drop

1. Dividend payments season

  • In mid-May we published a detailed dividends strategy report
  • According to our estimates, 1.8 trln roubles out of 2,7 trln roubles in 2018 dividends are yet to be paid out by the Russian companies, some 180 bln roubles was paid out since 20 May 2019. Exporters account for the bulk of payments (77%). The bulk of payments (42%) will come in July, 26% – in June, 23% in August. The net effect of dividend payments for the rouble will be negative, as was in 2018, based on the expected conversion amount for foreign holders of Russian stocks. According to our estimates, after 1.8 trln roubles ($27.7 bln) are paid out, some $14 bln in rouble equivalent will be converted into dollars, including some $3 bln of funds held by private persons. The rouble equivalent is converted into dollars for foreign holders (holders of depositary receipts and institutional international funds). Conversion is carried out by international custodian banks (BNY, JPM, Citi) as soon as the dividend payments originally in rubles are received from the depositary (that must transfer the dividends within seven days)
  • The bulk of such operations account for companies characterized by the largest payments and a significant share of foreigners in free-float, such as Sberbank, Gazprom, Lukoil and Norilsk Nickel. There is another important factor that may lead to a decrease in the actual conversion amount – major companies, usually metal producers, such as Nornickel, buy currency for dividends in advance through currency swaps, since their ownership structure is marked by offshore affiliation and common shareholders own other majors in the sector

The largest conversions of annual dividend payments for foreign holders by custodies, $ mln

The largest conversions of annual dividend payments for foreign holders by custodies chart

Source: ITI Capital, Bloomberg

Timeline for dividend payments in roubles and conversion into currency for the upcoming dividend payments

Timeline for dividend payments in roubles chart

Conversion into currency for the upcoming dividend payments chart

Source: ITI Capital, Bloomberg

2. MinFin interventions and FX liquidity on the local market

  • According to our estimates, monthly FX-buying will on average be comparable to the figure announced in May – 300 bln roubles or 356 bln roubles ($5.5 bln) including FX-buying suspended for three years
  • The average daily volume will amount to 17–18 bln roubles, or 13–15% of the daily trading volume against 5–7% at the beginning of the year, since in May average value trading dropped by 45% yoy drop
  • We believe that this will have a significant negative impact on the rouble, as we witnessed in May, and partly offset the positive effect of FX-sales during tax and dividend payments

Estimates of MinFin FX-buying

 Estimates of MinFin FX-buying chart

Source: Russia’s MinFin, ITI Capital, Bloomberg

3. Lower seasonal export revenues in foreign currency and impact on short-term FX-liquidity

  • O&G exports traditionally tumble in the second and third quarters resulting in lower export earnings due to a drop in seasonal production and pick up in petroleum production at refineries
  • Lower export revenues result in a weaker current account due to decreased exports of commodity goods in this period, which, in turn, leads to a slowdown in the growth of funds on the correspondent accounts of the Russian banks and foreign and corporate FX-deposits and consequently affects short-term FX-liquidity, which has significantly stabilized year-to-date and marginally exceeds the minimum level of $90 bln, according to our estimates
  • Short-term liquidity has come back to the levels seen in April and May 2018 due to an increase of FX on the correspondent accounts due to the inflow of funds from exporters and non-residents for OFZ-purchases. This, in turn, has led to a $7 bln increase in corporate FX-deposits and a $4 bln growth of retail deposits. Therefore FX-liabilities have surpassed assets for the first time since August 2008
  • Hence, strong FX-liquidity reserves have been formed, limited by potential risks, for example, by tough US sanctions against Russia

4. External debt payments and overall impact on net FX liquidity

  • Corporate debt and net payments will decline, but will remain significant, especially in June, July and, to a lesser extent, in August
  • According to a survey conducted by the Bank of Russia, the share of intragroup lending of the total external debt payments by major borrowers in 2019 will be 0% in July and August and 61% in September, suggesting a lack of refinancing funds, which may put additional pressure on FX-liquidity amid MinFin’s FX-purchases and payments to foreign shareholders in the dividend season

Net FX-balance ($ bln) will significantly decrease in July and affect the exchange rate in August.

Net FX-balance and USDRUB chart

Source: CBR, ITI Capital, Bloomberg

FX-balance estimate for Russia’s local market, bln $

 FX-balance estimate for Russia’s local market chart

Source: CBR, ITI Capital, Bloomberg

Global factors and key events

Global factors and key events

Source: ITI Capital, Bloomberg