Experts allowed the ruble to fall by 20% during the escalation in Ukraine

Military escalation in Ukraine and tough sanctions could lead to a depreciation of the ruble and, as a result, a tightening of the Central Bank’s policy and foreign exchange interventions to ensure financial stability, Renaissance Capital analysts say

In the event of a military escalation in Ukraine and the imposition of tough sanctions against Russia like the Robert Menendez package, the ruble could fall sharply in price, and Russian regulators could take emergency measures to stabilize the financial market. This is stated in the review of the investment company Renaissance Capital (RBC has it).

“In this case, we expect that the outflow of funds from the debt and, more importantly, the stock markets may approach the indicators of 2014-2015 (the beginning and acute phase of the conflict in eastern Ukraine. — RBC), with the depreciation of the ruble up to 20%, the expansion of the country risk premium by 200 basis points and a comparable tightening of the monetary policy of the Central Bank,” says Renaissance Capital.

Economist at Renaissance Capital Sofia Donets explained to RBC that part of the depreciation of the ruble (about 5%) due to tensions in Ukraine has already been realized: the ruble is now trading at levels of 76-77 rubles. per dollar. The risk scenario with military escalation will mean that at the moment the dollar exchange rate can reach 85-90 rubles. The expansion of the country risk premium implies that by 200 b.p. the gap between the yield on Russian foreign currency Eurobonds and the yield on benchmark US government bonds will widen. However, “if we attribute a 15% probability to the military scenario, then the “soft escalation” scenario will have at least 40% probability,” analysts of the investment company noted.

Experts predict that in the worst case scenario due to “liquidity squeeze”, Russian regulators may need to take such emergency measures as the introduction of capital controls, commissions for non-residents for the sale of federal loan bonds (OFZ) in order to slow down the flight of foreign capital etc. Also, the authors of the material do not rule out foreign exchange interventions by the Central Bank to ensure financial stability. Since the Bank of Russia switched to inflation targeting and a floating exchange rate, it has practically not carried out its own foreign exchange interventions, but it has the right to use such an instrument in emergency situations, for example, to contain a potential collapse of the ruble.