Russia's ruble: From down-and-out to darling

What a week it's been for Russia's ruble—the currency that was in crisis in December has hit new highs against the dollar and euro to become this year's best performer in foreign exchange markets.

The ruble soared as much as 2 percent against the dollar on Friday to around 50.30, it best level since December. In addition, it jumped as much as 2.5 percent against the euro to around 53.40 per euro, a high for the year.

Analysts said that a stabilization in the price of oil—a key export for Russia—plus relative calm in Ukraine and a perception that Russia's economic outlook is not as bleak as feared help explain the rebound.

"It came as a surprise for everyone, oil is a little higher and the main factor, but doesn't explain the full extent of the rebound," said Liza Ermolenko, emerging market economist at Capital Economics.

"The economy has not collapsed as many people expected, so this may also be a reason for the ruble's recovery," she added.

An employee counts Russian ruble banknotes at an office in Siberia in December, 2014.
Ilya Naymushin | Reuters

Russia's economy, weighed down by sanctions and weak oil prices, is slipping into recession, but there are some signs of light on the horizon further ahead. Earlier this week, ratings agency Standard & Poor' upgraded its prediction for Russian economic growth in 2016 to 1.9 percent, from a previous forecast of zero growth.

Ermolenko and other analysts added that the speed of the currency's recovery from a crisis in December, when it lost over 30 percent of its value in just two days, has been somewhat unexpected.

Ahead of the pack

A fifth day of gains has put the ruble up almost 12 percent against the dollar so far this year – making it the best performing emerging market currency, analysts said.

It's also well ahead of major currencies such as the euro and Japanese yen, which are weaker against a broadly robust dollar.

The U.S. dollar index, which measures the greenback against its peers, is up about 9 percent this year.

Nomura strategist Dmitri Petrov provided another reason for the ruble's sharp rebound– foreign interest in Russian assets.

"Given the large interest from international investors in March (Moscow was literally full of foreign investment bank research trip groups) and the recent good demand for OFZ [bond] auctions, it is likely that non-resident flows have turned positive," the Russia expert said.

Will it last?

Petrov said that in the short-run, the ruble had room to appreciate beyond the 50-mark per dollar area, before weakening to the 65-70 area over the medium term.

"The ruble has gone a long way but I don't see a sharp reversal from here, more a narrow range," said Benoit Anne, head of emerging market strategy at Societe Generale. "There are still risks out there for the currency."

These risks, said analysts, included the outlook for oil, instability in Ukraine and economic weakness.

"Russia is still in a very difficult situation; sanctions are still in place," said Ermolenko at Capital Economics. "We will wait and watch the ruble over the next week or so before we re-examine our outlook."