CREDIT SUISSE: The Russian ruble selloff has 'gone too far'

The Russian ruble has been steadily declining against the dollar since last week, when the US Treasury Department announced sanctions on dozens of officials and entities with ties to the Kremlin.
But a falling risk premium could keep the currency from weakening further, according to analysts at Credit Suisse.
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There may be hope for the Russian ruble after all.

Increasing tensions between Washington and Moscow have sent the currency spiraling more than 12% versus the dollar over the past week. But the ruble selloff "has gone too far," Credit Suisse analyst Nimrod Mevorach said Wednesday.

While a full recovery seems unlikely, according to Mevorach, the possibility of a shrinking risk premium could keep the currency from falling further.

The Russian bond market panicked after the US Treasury Department rolled out new sanctions on Moscow last week. Five-year credit default swaps — the cost of insuring Russian dollar debt — have jumped to 162 basis points, the highest level since August 2017. The yield on 10-year ruble bonds is also on a steady rise, now up to 7.60%.

"The risk premium on the rouble is high and probably too high at this point," Mevorach said. "We think it is plausible to expect some reduction in this sizable risk premium which has the potential of pushing USDRUB lower."

He sees the sanctions, which target dozens of individuals and entities with ties to the Kremlin, as having limited reach.

"They imply only to a short-list of government officials and oligarchs and their assets/companies and as such they lack the potential of causing a major direct impact on the Russian economy," Mevorach said.

Still, noting uncertainty in Washington, Mevorach is remaining cautious with optimism for the ruble.

"Recent appointments in the Trump’s administration undermine the idea that the US administration is not actively looking to escalate the situation with Russia," Mevorach said, possibly referring to foreign policy hardliner John Bolton, who was tapped as national security adviser last month.

There could be good reason for concern. Early Wednesday, President Donald Trump took to Twitter to taunt Russia for its involvement with the Assad regime, who was recently accused of another chemical attack on Syrian civilians.

"Russia vows to shoot down any and all missiles fired at Syria," he tweeted. "Get ready Russia, because they will be coming, nice and new and 'smart!' You shouldn’t be partners with a Gas Killing Animal who kills his people and enjoys it!"