Ruble Gaining Most in Seven Months on Oil Rally: Russia Credit
Russia’s currency is gaining the most in seven months and the cost to protect government debt payments is tumbling as the rising price of oil lifts confidence in the economy of the world’s biggest energy exporter.
The ruble climbed 1.7 percent against the dollar in the first week of trading after Russia’s New Year’s holiday, the largest advance since June. Credit-default swaps dropped to 141 basis points on Jan. 14 from 175 at the end of November, according to prices from CMA, a London-based data provider. A rally in government ruble bonds due in 2016 cut the yield to 7.57 percent from as high as 7.78 percent on Dec. 13.
The ruble is beating currencies of Brazil, India and China this year, a turnaround from 2010 when it was the only one among the so-called BRIC nations to fall against the dollar. Oil advanced to the highest price in two years last week at $91.86, boosting Russia’s revenue. The budget deficit may shrink to 3 percent of gross domestic product this year, from 3.9 percent in 2010, according to Finance Minister Alexei Kudrin.
“This may set the tone for this year, we expect the ruble to appreciate,” Carolin Hecht, a currency strategist at Commerzbank AG in Frankfurt, said in a phone interview. “Oil prices are expected to be favorable for the ruble.”
Investors have been paring bearish foreign-exchange bets, with three-month non-deliverable forwards, which provide a guide to expectations of currency movements and interest-rate differentials, strengthening 5 percent since Nov. 30 to 30.2562 per dollar today.
The ruble gained 1.5 percent last week against Bank Rossii’s target basket, which comprises about 55 percent dollars and 45 percent euros, to 34.6049. It reached the strongest level against the dollar in three months at the close on Jan. 13, and weakened 0.1 percent to 30.0475 per dollar on Jan. 14. The Russian currency strengthened 0.2 percent to 29.9751 per dollar today.
While higher crude prices are increasing import bills for China and India, oil and natural gas account for a quarter of Russia’s economic output and provided 46 percent of budget revenue in the first 11 months of last year, according to data from the Finance Ministry. Crude prices rose 14 percent in the fourth quarter as the global economic recovery gathered pace, the biggest increase in 18 months.
Quickening inflation is helping to buoy the ruble by boosting expectations the central bank will need to raise interest rates, increasing the attractiveness of ruble- denominated assets. Prices climbed 8.8 percent in the 12 months to December, the most in a year, according to government data.
Bank Rossii raised the deposit rate by 25 basis points, or 0.25 percentage point, to 2.75 percent last month and Chairman Sergei Ignatiev said benchmark costs may climb in the first quarter.
Gains in Russia’s dollar bonds due in 2020 pushed the yield 1 basis point lower to 4.973 percent today. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 1 basis points to 189 today, according to JPMorgan Chase & Co.’s EMBI+ indexes. The difference compares with 129 for debt of similarly rated Mexico and 167 for Brazil.
The yield spread on Russian bonds is 46 basis points below the average for emerging markets, twice the discount six weeks ago, JPMorgan indexes show.
Russia credit-default swaps were 63 basis points less than the Markit iTraxx SovX CEEMEA Index of contracts for eastern Europe, Middle East and Africa. The discount widened to 66 on Jan. 6, the biggest gap since Sept. 23, according to data compiled by CMA.
Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment-grade rating, cost 1 basis point less than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to comply with debt agreements.
The ruble’s rally may stall in coming weeks as Russian companies sell the currency to buy assets abroad, said Manik Narain, an emerging-market currency strategist for UBS AG in London. The government may also keep more of its oil earnings in the U.S. currency rather than converting to rubles after the Finance Ministry said it withdrew $15 billion from its reserve fund in December, Narain said.
“The correlation between the ruble and the oil price is not necessarily going to be a sustained positive one, at least not as positive as it has been over the past four to five weeks,” Narain said in a phone interview. UBS closed a long ruble position on Jan. 12 that it had held since Oct. 12, he said.
The cost of insuring Russian debt with credit-default swaps has fallen from more than 1,000 basis points in 2008 when Lehman Brothers Holdings Inc. filed for bankruptcy protection, triggering the global financial crisis.
Credit-default swaps for Moscow-based OAO Gazprom, Russia’s largest company and the world’s biggest natural gas producer, fell to the lowest since Nov. 5 at 200 basis points on Jan. 12. Contracts for OAO Sberbank, Russia’s biggest lender, also based in Moscow, cost 180 basis points on Jan. 14, down from 226 basis points on Dec. 1.
“With oil prices above $90 and liquidity conditions moving in favor of the ruble, we see people coming back to the ruble,” said Bartosz Pawlowski, head of currency and interest-rate strategy for central and eastern Europe, the Middle East and Africa, at BNP Paribas SA, France’s largest bank.
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