USD/RUB and EUR/RUB are not market-driven or floating exchange rates. Even so, at this time, these exchange rates are reflecting excessive optimism that the Ukraine war may somehow end and that some of the harsh sanctions on Russia may be removed. In the background, however, financial stress is brewing. We see USD/RUB and EUR/RUB rising steadily, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

USD/RUB and EUR/RUB to steadily trend up over the coming year

"We have long argued that the rouble exchange rate (versus hard currencies such as the US dollar or euro) is a ‘technical fix’ or an artificial exchange rate. In addition to the original Ukraine sanctions, which blocked Russia’s central bank (CBR) from transacting in USD and EUR and also disconnected major Russian banks from SWIFT, last year additional US and EU sanctions targeted also the Moscow exchange (MOEX) and included systemic energy payment processing banks in the SWIFT disconnection."

"After that the rouble exchange rate lost most connection with fundamentals, only retaining a weak indirect connection via, for example, flows in CNY (which remain open) – this imposes some consistency between, for example, USD/CNY and USD/RUB crosses. Because of such a link, the rouble could recover sharply in the event that the US administration were to favour Russia and lift key sanctions. Equally, the exchange rate would depreciate markedly if financial stress were to develop in the economy."

"It would be misleading for us to claim that we have a clear idea whether or not a systemic crisis could come to pass over the coming year. The idea here is to highlight to readers that the balance of risk is taking a turn towards the worse. The rouble exchange rate, however artificial and technical it may be, will depreciate markedly in the event that the situation progresses further in the direction of financial stress. We forecast USD/RUB and EUR/RUB to steadily trend up over the coming year."