Ruble Heads for Weekly Slide on Oil Before Fitch Rating Decision

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The ruble fell as the biggest weekly drop in oil prices in almost three months outweighed optimism Fitch Ratings will retain Russia’s only investment-grade rating.

The currency weakened 0.5 percent to 55.824 per dollar as of 5:49 p.m. in Moscow, heading for a weekly decline of 1.9 percent. Brent crude retreated 1.1 percent, poised for a 3 percent decrease in the last five days. Government bonds, known as OFZs, slid.

The Russian currency has dropped 12 percent since May 18 as the central bank bought foreign exchange to replenish its reserves, adding to the impact of interest-rate cuts this year. Fitch is the only one among the three major rating companies to keep Russia at investment grade. Finance Minister Anton Siluanov said July 2 he doesn’t expect the agency to revise that rating on Friday.

“Nobody is counting on the Fitch downgrade at the moment, so if it happens, the ruble and OFZ will suffer significantly,” Yury Tulinov, the head of research at PAO Rosbank in Moscow, said by e-mail. “The ruble has strengthened, risks to financial stability have weakened and rates have come down, while international reserves are being replenished. There are more reasons not to cut the rating.”

While still the best performer in the world this year, the ruble has fallen more than any other emerging-market currency in the past month as the effect of rebounding oil prices fades. Approaching foreign-debt payments and a shrinking economy may lead to a further 10 percent drop this quarter, said BNP Paribas SA’s Piotr Chwiejczak, the most accurate ruble forecaster in the four quarters through June 30.

Oil Factor

“We believe that Fitch won’t downgrade Russia as there hasn’t been a significant deterioration since the last review,” Alexei Egorov, an analyst at PAO Promsvyazbank in Moscow, said by phone. “The oil price remained a key factor for the ruble this week.”

The yield on five-year government notes due May 2020 increased two basis points to 11.15 percent. The Micex Index of equities dropped 0.5 percent, heading for the first back-to-back weekly losses since May. OAO Gazprom retreated 0.8 percent, while OAO Lukoil lost 1 percent. The dollar-denominated RTS Index declined 1.2 percent.

Russia equity funds lost $116.7 million in the week ended July 1, with Russia-dedicated equity funds posting outflows of $35.2 million, Gazprombank said in an e-mailed note, citing EPFR Global data.

The Finance Ministry proposes buying foreign currency for one of its two sovereign wealth funds if oil prices rise higher than $70 per barrel, Siluanov told reporters Thursday. Russia should start replenishing its Reserve Fund with proceeds from higher oil prices to stem the ruble’s appreciation, according to Siluanov.

“Although Russia’s composite rating is already below investment grade, we think that potential downgrade could still be important as it could push Russia’s composite local currency rating below investment grade,” Vladimir Osakovskiy, the chief economist for Russia at Bank of America Corp. in Moscow, said in e-mailed comments.

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