When It Comes to Ruble, Oil Means More to Citigroup Than Putin

  • Ruble's correlation with oil breaking down on currency's rally
  • Paris attacks seen repairing Russia's international relations

Beware the rally in the ruble.

The best-performing major currency in the five days through Thursday is being buoyed by a thaw in relations between Russia and the West following the terror attacks in Paris, and the prospect this will lead to the dismantling of sanctions imposed over the Ukraine conflict. Yet with oil near a six-year low, Citigroup Inc. and Morgan Stanley say the gains can’t last.

The ruble may have started to decouple from crude, but as recently as last month it was moving almost in lockstep with the price of Russia’s biggest export. And with the Federal Reserve preparing to raise interest rates, strategists surveyed by Bloomberg see the currency tumbling versus the dollar along with its emerging-market peers.

“Ruble assets have found useful support over the last week on a perceived rapprochement between Russia and the West,” said Ivan Tchakarov, a Moscow-based economist at Citigroup, the world’s biggest currency trader. “This relationship may, however, be tested over the coming days and weeks as fundamentals continue to be weak, oil prices remain under pressure and a December Fed liftoff seems increasingly likely.”

The improvement in relations between Russia and the U.S. raised the prospect that sanctions imposed over the Ukraine conflict, and which have kept President Vladimir Putin isolated for more than a year, will be dismantled.

Crude Link

The ruble weakened 0.5 percent to 64.9480 against the dollar as of 3:04 p.m. in Moscow, paring its advancethis week to 2.8 percent and giving it a 9.7 percent decline in the year. That compares with a record low of 80.1 in December, about a month after the currency was freely floated.

The correlation between the ruble and Brent crude oil increased in the wake of that decision, reaching a record 0.9 last month, where a figure of 1 would mean they were moving together. The currency’s recent gains saw the relationship drop to 0.7, data compiled by Bloomberg show.

That imbalance is bad news for Russia because a stronger exchange rate means Russia gets fewer rubles for each barrel of oil it sells abroad.

The currency would have to weaken as much as 7 percent to between 65 and 70 per dollar before it reflected the drop in oil prices, according to Yury Tulinov, the head of research at Societe Generale SA’s Rosbank PJSC unit.

“The ruble is too strong,” Tulinov said from Moscow. “If oil doesn’t start rising significantly, the ruble will weaken.”

Hurting Revenues

One barrel of Brent crude brought in 2,867 rubles for Russia’s government as of Thursday, close to the lowest price in local-currency terms in almost five years and below the 3,323 average for the past 12 months. Prices in dollars have more than halved since the middle of 2014 and stayed below $50 a barrel for most of the past three months.

Russia’s Finance Ministry collects almost half of its budget revenue from the oil and natural gas industries.

Options traders are also positioned for the ruble rally to end.

While the net cost of contracts protecting against a decline has been falling, it’s still the highest for any major currency part from the Argentine peso, data compiled by Bloomberg show. The premium for options to sell the ruble over those to buy was at 4.8 percentage points, compared with an all-time high of 24 percentage points in December.

Citigroup sees the ruble sliding 5 percent to 68.4 per dollar by the first quarter of 2016, roughly in line with the median estimate of a Bloomberg analyst survey, which puts it at 68. Morgan Stanley is more pessimistic, forecasting a drop to 71, close to a seven-month low of 71.65 reached in August.

“The ruble is becoming expensive,” Morgan Stanley strategists led by London-based James Lord wrote in a client note this week. “Oil remains the wild card.”

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