Since the sanctions effort and downturn in global energy prices, Russia has faced a mounting set of challenges when it comes to stemming the slide in the Ruble. The global economic environment has made it extremely difficult to overcome slowing commodity demand and shrinking trade. When combined with the costly endeavors in the Middle East, Ukraine, and persistent domestic woes and falling government revenues, the economy faces an uphill climb when it comes to surmounting Russia from all sides. Strategies to improve the economy have been extreme, but the global growth environment remains a steadfast headwind.

Devaluation Benefit Subsiding

Last year’s tremendous devaluation of the Russian Ruble might have initially been a problematic development, but in many ways proved fortuitous as is mirrored the slide in the oil and gas prices, enabling the government to go ahead and make sure it saw revenues stay relatively intact. As of the latest estimates from October 10th, the Russian Government only expects to see the government run a deficit of 3.00% of GDP this year. In comparison to the 45% slide in oil prices, this is not bad considering other dollar pegged economies such as Saudi Arabia are seeing revenues collapse and sovereign wealth funds tapped to pay for the shortfall. Russia has seen the depletion of 25% of its total currency reserves in the last year alone, nearly $125 billion in an effort to support the economy.

Elevated Inflation Hampers Policy Adjustments

The Central Bank hemorrhaging reserves, while important, masks the real fight against inflation which currently tops 15%. Rates have come down substantially from the 17% seen last December, now sitting at 11%. It is amazing to see such a substantially high rate considering the global deflationary environment encircling advanced economies. Efforts to continue to bring down borrowing costs might nevertheless be dangerous considering the outsized moves lower in commodity prices recently. Fiat Rubles might have lost substantial value over the last year, but growing gold reserves which have doubled in the last five years from below 700 tonnes to 1352.2 tonnes could bolster the currency’s position over the long-term.

While GDP has slid only -4.10% on an annualized basis, the question remains as to how long Russia can keep up its ambitious efforts both domestically and abroad. Support for Vladimir Putin remains high especially on the heels of the fight against ISIS. Nevertheless, high profile recent events have thrust the issue into the public spotlight in detrimental ways including the downed tourist out of Sinai and setbacks in Syria. Increased deployment of military forces across the globe combined with the determination to upgrade the existing army infrastructure will prove a costly endeavor that will quickly drain public coffers. After two straight months without rate cuts, tempering inflation is a central theme that has seen Russia enter the first recession in six years.

The economy might have bottomed as far as the pace of losses are concerned, but faces a grueling road ahead to recover. Import restrictions on European made products have seen consumer inflation back on the uptick, preventing the Central Bank from moving to reduce borrowing costs further to alleviate and ease consumer and corporate conditions further. However, just because the pace of economic contraction might have peaked, does not mean it cannot give further ground in the coming quarters with energy prices forecast to remains at subdued levels for years. As the chief export item for the economy, a sustained period of low prices will make it difficult for Russia to see a true rebound and with it the Ruble.

Technical Considerations

From a technical point of view, there is substantial upside to be felt in the USD/RUB pair from numerous indicators. A quick look at the one-week candlestick chart shows the formation of an ascending triangle pattern, representing a consolidation between the prevailing long-term uptrend in the pair and horizontal resistance at 71.7000 currently acting as a ceiling for the formation. Traditionally a bullish pattern, a triangle-based breakout to the upside is anticipated with potential in the pair to reach back towards 80.000 levels in the USD/RUB pair last year before trading was briefly halted. A move and close above resistance when confirmed by higher than average volume on a 1-day chart is a strong indication of bullish momentum in the pair.

With the pair currently trending above both the 50 and 200-day moving averages which are concurrently moving higher confirms that bullish momentum is set to continue over the medium-to-long term. Conditions on a shorter-term basis are pointing to potential for the USD/RUB to be slightly overextended, meaning a pullback will prove a strong entry point for a Call position trying to take advantage of a triangle-based breakout. The RSI is nearing the technically overbought levels of 80 and while the stochastic has yet to see the prevailing trend change, a crossover of the signal line might be sign of a good short-term correction Put position entry point. However, on a longer-term basis and taking into consideration the prevailing fundamental picture, any dips in USD/RUB should be taken as an opportunity to initiate Call positions to take advantage of the breakout setup.

The sheer amount of obstacles confronting Russian policymakers is uncanny. Difficult economic conditions combined with a hawkish government is seeing the outlook for Russia continue to decline as costs grow while revenues shrink on the back of faltering energy markets. Growing exposure to regional and international conflicts combined with extraordinarily high consumer inflation are seeing sentiment increasingly shift negative especially in light of worsening external conditions in the global economy. With no end in sight for current policies, Ruble losses are set to persist, with the USD/RUB pair likely to test 1-year highs considering the confluence of weaker fundamentals and emerging technical indicators biased upwards.