After laying dormant for years, political risk in Russia is back, and that has some investors going cold on the ruble.
Russia's currency has weakened by 3% against the dollar since the largest protests of the post-Soviet Union era erupted following disputed parliamentary elections held Dec. 4.
The ruble began 2011 as one of the world's best-performing currencies, thanks to its dual characteristics: It is the currency of a commodity-producing nation and of an emerging market. Before the elections, which observers say were riddled with ballot-box stuffing and other violations, the ruble was bouncing back from a late-summer selloff across riskier assets, thanks to rising oil prices. Russia is the world's second-largest crude-oil exporter.
On Monday, one dollar bought 31.9015 rubles, versus 31.9535 Friday, with most Russians reporting back to work Tuesday after winter holidays.
While the crowds of protesters have largely dissipated for now, concerns over the stability of Russia's political system remain, even though Prime Minister Vladimir Putin—who has touted stability as a hallmark of his leadership—is still expected to win the March 4 presidential race to succeed Dmitry Medvedev.
Those concerns are prompting some investors—mindful of Russia's turbulent history and dramatic currency devaluations in 1992 and 1998—to sell rubles and ruble-denominated assets.
Acadian Asset Management, which has $50 billion under management, cut its exposure to the ruble in the days following the December demonstrations and is "sticking with that," said portfolio manager John Peta.
"It's never good when you have people in the streets," Mr. Peta said. "That could lead to more capital flight."
Russia saw $80 billion in capital outflows in 2011, more than double those of 2010, according to government estimates. Officials from the central bank and finance ministry have said wealthy Russians and firms are more likely to stash their capital overseas amid heightened political uncertainty. When they do so, rubles are sold for other currencies, pushing down its value.
Concerns over the coming transition of power have spread to financial markets across Russia. The benchmark Micex stock index is down by more than 4% since early December, while the J.P. Morgan Russian Bond Index fell 1.6% in less than two weeks after the parliamentary elections, before trimming some losses. Investors took money out of Russia-focused equity funds in the weeks after the election, according to EPFR Global. Jitters remained after a second Moscow rally on Dec. 24 brought out as many as 100,000 people.
Russia's central bank isn't offering much support, either. The central bank for years has intervened to keep the ruble in a targeted range against the euro and the dollar. On Dec. 27, the bank expanded that range to allow for greater daily fluctuations as part of continuing efforts to transition to a free-floating currency.
Morgan Stanley analyst Jacob Nell said a wider trading band—combined with capital outflows, domestic political uncertainty and European sovereign-debt problems—increases the chances the ruble will weaken past his first-quarter target of 32.10 rubles against the dollar.
There are factors working in the ruble's favor. World oil prices are forecast to stay above $100 a barrel, and Russia's oil exporters must convert a portion of their dollar-denominated oil revenues into rubles. Also, definitive progress on a solution toward Europe's debt crisis would likely jump-start investors' risk appetite, boosting emerging-market currencies.
Market watchers say to look for a pop in the ruble after the March presidential elections.
"Once the political situation settles and people understand what the new order will look like, a good part of the money that was moved out of Russia will return," said Julia Tsepliaeva, chief economist at BNP Paribas in Moscow, who forecasts positive inflows for 2012.
But others aren't so sure.
Michael Lee, co-manager of the Wells Fargo Advantage International Bond Fund, with $1.63 billion under management, says he is keeping a lid on his exposure to Russia, even as he adds assets denominated in other emerging-market currencies across several investing portfolios. The bond fund currently holds no ruble-denominated bonds, just Russian sovereign debt denominated in dollars. Mr. Lee said he was wary of Russia's growing political risk, alluding to last year's Arab Spring—popular uprisings that toppled entrenched leaders but left governments and economies in disarray.
Among the concerns, "one quite clearly is the political noise which is around us and quite clearly will remain elevated," he said. "We worry about the fact that we've seen how these protests have grown in the Middle East and even in other areas."
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