Ruble Caps Third Annual Slump as Oil Seen Stoking Losses in 2016

  • Russian bonds gave 2nd-biggest returns in emerging markets
  • UralSib sees risk of ruble weakness, limited upside for bonds

The ruble weakened on its last trading day of 2015, extending its third annual slide as the plunging price of oil dimmed the outlook for a recovery in the Russian economy.

The currency fell 1.7 percent to 73.42 against the dollar by 6:30 p.m. in Moscow, bringing its loss in the past 12 months to almost 20 percent. Brent crude, used to price the nation’s main export blend, slumped below $37 a barrel. Data on Wednesday showed a gauge of Russian manufacturing slid back into territory that signals a decline in economic activity, casting doubt on how quickly the energy exporter will be able to pull itself out of its worst recession since 2009.

Ruble has lost almost 60% of value in past three years
Ruble has lost almost 60% of value in past three years

While the ruble has been falling, it isn’t keeping up pace with the drop in oil prices, thereby hindering state revenue as the government seeks to finance a fiscal shortfall. After losing almost 60 percent of its value in three years, the currency has also exerted pressure on inflation running at almost four times official medium-term targets.

"The ruble may weaken further," said Alexey Korolenko, a money manager at UralSib Asset Management in Moscow. "It’s hard to expect stronger oil right now. It should rise to $45-$50 per barrel, maybe, by the end of 2016. Reduction of investments should eventually make impact, the question is what the lag will be."

Trading on the Moscow Exchange is closed on Dec. 31.

Best Bonds

Korolenko holds a similarly pessimistic view of the outlook for Russian bonds in 2016 after the debt handed investors returns of 13 percent in 2015, the most after Nigeria in the Bloomberg Emerging Market Local Sovereign Index. He and Konstantin Artemov, a manager of fixed-income portfolios at Raiffeisen Capital Asset Management, are predicting bonds won’t have much upside next year based on their outlooks for interest-rate cuts.

The Bank of Russia lowered benchmark borrowing costs by six percentage points to 11 percent this year before keeping them on hold since July due to an increase in inflation expectations with the renewed selloff in the ruble. Policy makers want to reduce the rate to ease pressure on the economy, set to shrink 3.8 percent in 2015 according to analysts surveyed by Bloomberg.

Government bonds rallied in 2015 as the central bank cut rates
Government bonds rallied in 2015 as the central bank cut rates

Five-year government notes yielded 9.94 percent on Wednesday, compared with 15.41 percent at the end of 2014. Analysts surveyed by Bloomberg predict the key interest rate will fall to 8.75 percent by the end of 2016.

"I don’t see any big rally next year," Artemov said from Moscow. “The market has priced in rate cuts, both those that have already happened and those that might happen next year."

In a sign the economic slowdown may drag on, Russia’s Purchasing Managers’ Index fell to 48.7 in December, a reversal from the positive 50.2 and 50.1 readings in October and November, according to a statement released by Markit Economics on Wednesday. That missed the median estimate of six analysts for 49.5, below the threshold of 50 that separates contraction from growth.

Stocks Rally

Bank of Russia Governor Elvira Nabiullina signaled policy makers will resume monetary easing at one of the next meetings in the first quarter of the year if movements in consumer prices allow. Inflation expectations declined to a five-month low in December, the authority said on Tuesday. On an annual basis, the rate was 15 percent in November, compared with a target of under 7 percent by October next year and 4 percent in 2017.

As the ruble slumped and bonds rallied in 2015, Russian stocks staged their best performance since 2009, jumping 26 percent. Even after the gains, the benchmark Micex Index is trading at 5.7 times projected the 12-month earnings of its members, compared with a multiple of 11 for the MSCI Emerging Markets Index.

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