Russia’s rouble has rekindled an intense sensitivity to the risk of US sanctions, sinking during Moscow’s latest military build-up on the border with Ukraine and picking up only on Tuesday’s announcement of talks between Joe Biden and Vladimir Putin.

The country’s currency has dropped more than 3 per cent in the past month to trade at around 76 to the US dollar. The rouble’s fall over the period had been among the most severe of any leading emerging market currency, but a bump higher on Tuesday afternoon helped ease the slide.

Analysts had expected the rouble to bounce back in 2021 after it fell by 16 per cent last year because of the pandemic and the related fall in oil prices.

But even as Russia’s resurgent economy prompted the economy ministry to adjust its growth projections upwards to 3.8 per cent last week and Russian companies have rushed to take advantage of the equities boom to sell shares, the rouble has hinted at Moscow’s macroeconomic vulnerability to strained relations with the west.

“Geopolitics is what’s moving the currency market right now — worries about tougher sanctions from the US, which there were more than enough triggers for over the past few weeks even before you added in the intensifying situation on Ukraine’s eastern border,” said Sofya Donets, Russia & CIS economist at Renaissance Capital.

Timothy Ash, chief strategist at BlueBay Asset Management, echoed that sentiment, saying: “It’s crystal clear that right now concerns about geopolitics are what’s affecting the rouble.”

Line chart of Russian rouble per US dollar showing Russia

In a sign of how sensitive the rouble is to potential diplomatic shifts, it rallied on Tuesday after a phone call between US president Biden and his Russian counterpart, Putin. The White House said Biden voiced “concerns over the sudden Russian military build-up in occupied Crimea and on Ukraine’s borders, and called on Russia to de-escalate tensions”.

The recent worries have also rippled into Russia’s sovereign bond market, a likely target for US sanctions expected to be announced in response to the SolarWinds hack, Moscow’s alleged meddling in the 2020 presidential election, and the poisoning and jailing of Alexei Navalny, Putin’s most prominent opponent.

A JPMorgan index of rouble-denominated Russian debt has dropped 4.4 per cent this year on a total return basis, worse than a 2.6 per cent fall for the bank’s diversified emerging market local currency bond gauge.

Meanwhile, the share of Russia’s rouble-denominated OFZ bonds held by foreigners fell to a more than five-year low of 20.2 per cent in March, down from more than 30 per cent just a year earlier.

Russian stocks have risen around 6 per cent in local currency terms this year, but are up 2.6 per cent on a dollar basis, when accounting for the 2021 fall in the rouble, according to MSCI indices. That performance is roughly in-line with the index provider’s broad EM benchmark, which is up 2.5 per cent in dollar terms over the period.

Ash said Russia’s macroeconomic fundamentals, including a current account surplus and tailwinds from rising oil prices, all underpin frequent recommendations from investment banks to buy the country’s assets.

Line chart of Non-residents

“It looks like a no-brainer but for geopolitical risks, and [eastern Ukraine] is weighing on people’s minds. The rouble underperformed the South African rand significantly last month so that suggests that it’s a local story rather than broader emerging market story.”

Emerging markets in general have been under pressure recently because of rising US bond yields, which makes the higher returns typically provided by the riskier assets look less appealing.

The Kremlin has responded to the jitters by saying “nothing’s running a fever over here” but said that the tensions with Ukraine “have an emotional effect on markets”. Dmitry Peskov, Putin’s spokesman, said last week that “the macroeconomic situation is absolutely stable and predictable” and claimed rouble volatility would have no effect on it.

But the Kremlin’s own stance likely prompted the first signs of trouble when Russian investors began selling roubles last month. Russian investors “were moved partly by the domestic political rhetoric from the Kremlin, which has become significantly harsher in mood and intensity recently,” Donets said.

Russia arrested more than 10,000 pro-Navalny protesters in January before jailing the anti-corruption activist, who is on hunger strike against what he described as torture and wardens’ refusal to grant him medical care in a notorious prison colony outside Moscow.

Ahead of parliamentary elections in September, Russia has rushed to pass restrictive new laws against dissents and expanded its powers to control the internet, where Navalny has galvanised opposition to Putin.

Line chart of JPMorgan global bond indices  showing Russian bonds have underperformed emerging market peers

Peskov said last week that Russia’s economic officials had plans to prevent a repeat of “Black Tuesday,” the day in 2014 when oil prices and sanctions fears hit the rouble so hard that the central bank intervened by raising interest rates 6.5 points to 17 per cent.

Since 2018, the finance ministry has introduced a fiscal rule under which surplus oil revenue above a budgetary break-even price of $43 per barrel is squirrelled away in a national wealth fund.

But by reducing the rouble’s dependence on oil, Russia has increased its sensitivity to geopolitical shocks from the sanctions, according to Artem Zaigrin, chief economist at Sova Capital. “With the persistent execution of the fiscal rule, the currency gets less support from higher oil prices,” he said.