With Trump in the White House, the traditional US-Russia relationship is under the spotlight. Here’s how a new found-relationship between the two powerhouses will affect companies exposed to the dollar/ruble spread.
President Trump has wasted no time making overtures towards Russian President Vladimir Putin and one thing is clear – the new U.S administration will foster a more friendly relationship between the two nations.
Russia certainly wasn’t upset by Trump’s victory and it’s clear why. The new President has strong ties with the nation and is economically at odds with two of Russia’s biggest competitors, China and Japan. As the saying goes, an enemy of my enemy is my friend.
The relationship has already had a direct impact on the performance of the ruble against the dollar. In fact, the Russian ruble closed 2016 as the world’s best performing currency following Trump’s end of year victory and it has continued this momentum into 2017. The ruble is now at its highest level against the dollar since July 2015 – currently standing at 57.2 against the greenback.
For firms based in Russia that rely heavily on imports, a strengthening ruble is good news. Many industries, including Russia’s core energy sector as well as industries such as aviation, are hamstrung by a weak exchange rate. This is because, despite the fact their exports are more competitive globally, they rely heavily on machinery, technology and skills from outside the country which have to be imported. As a result, goods from America or abroad priced in dollars are significantly more expensive. However, CFOs in pure-exporter firms in Russia will feel the pinch of a steadily-strengthening ruble. Many of the major energy firms have gained from selling oil in dollars but using the weakened ruble for internal expenditure – boosting profits.
It’s not all rosy however in the Trump/Putin garden and uncertainty looms large. Trump is unpredictable and despite his positive attitude towards Russia, the relationship isn’t set in stone. Just this week, Trump tweeted, "Crimea was TAKEN by Russia during the Obama Administration. Was Obama too soft on Russia?"
With these inconsistencies in mind, financial directors and CFOs must create a strong FX risk framework while keeping a keen eye on the relationship and how it unfolds alongside a broader view of geopolitical events - and not just from the usual news outlets. Financial directors will have to have their finger on the Twitter pulse. Trump is unconventional and Twitter is his podium. Anything that will rock the relationship, and the currency pair, will probably appear there first.
Any CFO that finds themselves in a firm based within Russia or dealing with the currency will struggle with long-term planning and forecasting. A corporate’s annual profit could be dented or increased in as little as 140 characters. Trump and Putin are currently on good terms – but it’s a new relationship and one that companies need to monitor closely to manage their exposure.