Photographer: Scott Eells/Bloomberg

Ruble Weakens With Price of Oil as Citi Sees Currency Overvalued

  • Currency should be trading at about 70 versus USD, Citi Says
  • Brent in rubles drops to lowest level in almost six weeks

The ruble slid with the price of crude as Citigroup Inc. said the currency looks expensive compared with Russia’s main export earner.

The ruble weakened 0.3 percent to 64.87 against the dollar by 5:39 p.m. in Moscow, trimming the second-best advance in emerging markets this year. The 60-day correlation between oil and the ruble dropped to 0.56, near the lowest in a year. A reading of 1 would mean the two trade in lockstep.

The Russian currency has climbed 0.7 percent this month, compared with a 3.4 percent drop for oil, a mismatch that reduces the amount of local currency the government collects from each barrel of oil sold for dollars abroad. The average value of Brent in rubles this year is about 8 percent below the level stipulated in Russia’s budget, hurting the government’s efforts to plug the biggest deficit in more than half a decade.

“The ruble should be weaker relative to oil, probably a bit less than 70,” said Ivan Tchakarov, an economist at Citigroup Inc. in Moscow. “From a simple oil perspective, the ruble may need to be a bit weaker."

Carry Return

At the same time, that’s unlikely to happen, Tchakarov said, because the ruble will be supported by the central bank’s decision on Friday to keep the key rate unchanged until year-end. That makes the currency attractive as a carry-trade, when investors borrow where rates are low and invest in higher-yielding assets, he said.

Tchakarov predicts the ruble will trade at around 61 per dollar in six to 12 months. Carry traders have reaped 22 percent from investing in the ruble this year, the best return in emerging markets after Brazil.

The price of Brent in the local currency on Tuesday declined 0.8 percent to 2,947.04, the lowest level since Aug. 10.

Bonds in the world’s largest energy exporter fell, pushing the yield on 10-year debt up four basis points to 8.32 percent, the biggest move in central and eastern European debt markets. 

The Micex Index fell 0.5 percent to 1,978. Gas producer Novatek OJSC dropped 3.4 percent, it’s biggest intraday loss since June 24, after Kommersant reported the government may impose a higher extraction tax next year.

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