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By Bloomberg

Don’t get too excited about the Russian ruble’s best ever rally.

That’s the advice of banks from Credit Suisse Group AG to Sweden’s SEB AB, which warn that the currency’s 12 percent gain versus the dollar this month is vulnerable because it depends on a Ukraine cease-fire and Brent oil staying at about $60 a barrel. Options traders remain more bearish on the ruble than on any of its 31 major peers, and strategists are cutting their forecasts to anticipate an 8 percent decline by mid-year.

“It’s not a turning point,” said Per Hammarlund, the chief emerging-markets strategist in Stockholm at SEB, which sees the ruble tumbling 10 percent by the end of next month. “The risk of an oil-price reversal is significant. A resurgence of fighting in Ukraine would also weaken the ruble.”

A relapse in the exchange rate would heap further pressure onto President Vladimir Putin as the economy teeters on the brink of a recession and investment flees the country. Russia’s currency has plunged more than 40 percent in the past year as the price of oil, its biggest export earner, almost halved and the nation’s alleged role in the Ukraine conflict prompted the U.S. and European Union to impose sanctions.

‘Largely Exhausted’

The ruble climbed to a six-week high of 61.17 per dollar on Wednesday, up from a record-low of 80.1 on Dec. 16, before trading at about 62 in Moscow on Thursday. It’s on pace for its best month since Bloomberg started tracking prices in 1993.

While Russia’s currency may advance to 60 per dollar if the Ukraine cease-fire holds, the market “is pricing in too much positivity in the ruble,” Alexey Pogorelov, an economist at Credit Suisse in Moscow, said by e-mail on Tuesday. The rally “has been largely exhausted,” he said.

The turnaround from last year’s worst-performing major currency to February’s biggest gainer was spurred by a resurgence in Brent crude futures, which reached a high for the year of $63 a barrel on Tuesday, before slipping back below $60 later in the week. Bank of America Corp., UBS Group AG and Commerzbank AG say the reduction in U.S. drilling that prompted the rally won’t be enough to offset a global supply glut, and that prices will drop to $45 or lower in the next three months.

More Bullish

Not everyone’s so sure the ruble’s gains will prove fleeting.

If crude stabilizes at about $60 to $70, then “the ruble should rally because that makes Russia more sustainable,” New York-based James Barrineau, who oversees $1.5 billion of emerging-market debt at Schroder Investment Management Ltd., said Wednesday in an interview in London.

It’s not all bad news on the economy, either. The central bank surprised markets last month by cutting interest rates, which strategists said signaled a newfound determination to arrest the economic slump, even if it comes at the expense of more ruble losses.

Cutting Forecasts

Forecasters surveyed by Bloomberg predict declines in Russia’s currency second only to Argentina’s peso by mid-year. Strategists have lowered their median estimate for the ruble to 67.25 per dollar, from a forecast of 63.5 at the end of January. SEB sees the currency ending June at 60, after sliding to at least 68 next month.

To blame is the drop in oil and the sanctions imposed over Ukraine. The restrictions are devastating Russia’s economy, which the government predicts will shrink 3 percent this year. Standard & Poor’s became the first of the three major credit graders to cut the nation’s sovereign rating to junk on Jan. 26, putting it at the same level as Bulgaria and Indonesia.

Russian, Ukrainian and European leaders agreed on Thursday to stand by the recent cease-fire accord, even after fighting forced the government in Kiev to abandon a strategic crossroads town in the east of the country.

‘Risk Premium’

“The fluid situation in Ukraine still demands a decent- size ruble risk premium,” Tom Levinson, a strategist in Moscow at Sberbank CIB, a unit of Russia’s biggest lender, said by e- mail on Tuesday. While some investors may be tempted to buy the currency because it’s now “very cheap,” they should be prepared for a “sharp” decline if fresh sanctions are imposed, he said.

The cost of options to sell the ruble in three months has fallen, though they’re still more expensive than for any of the major currencies tracked by Bloomberg.

The so-called risk-reversal rate dropped to 10 percentage points on Thursday, down from a record 19.3 percentage points on Jan. 9, data compiled by Bloomberg show. That’s still about three times the rate of 3.4 points at the end of September.

“Russia is facing a lot of headwinds, even if we disregard geopolitics and assume that oil prices will be higher,” Lars Christensen, the chief emerging-markets economist at Danske Bank A/S, said by phone from Copenhagen on Monday. “We have a hard time seeing any sustainable long-term gains for the ruble.”