Ruble Gains as Oil Rally Spurs Russian Bonds Before Fundraising

The ruble strengthened for a second day and Russian bonds rallied as rising oil prices eased pressure on the nation’s finances before the government offers the most debt in more than two months.

Brent crude, the oil grade traders use to price Russia’s main export blend, has climbed 16 percent in past four days, outweighing pressure on the ruble fueled by a surprise interest-rate cut last Friday. The Finance Ministry will offer 10 billion rubles ($150 million) of floating-rate notes on Wednesday, double the size of last week’s plan, after Russia’s borrowing costs fell to a seven-week low. Stocks rose and the nation’s credit risk declined.

Policy makers are trying to stem the depreciation and control inflation while reducing pressure on an economy that analysts project will shrink 4 percent this year. As it lowered the key interest rate to 15 percent Jan. 30, the central bank sold the equivalent of $690 million to prop up the ruble, the biggest intervention this year, data released today show.

“The ruble is simply following the rebound in the oil price,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. “A very strong correlation persists, and the ruble’s sensitivity to the oil price gets bigger the cheaper the oil goes.”

The currency climbed 3.6 percent to 66.049 per dollar by 4:47 p.m. in Moscow as Brent gained 2.8 percent to $56.27 a barrel, supported by workers’ strikes at U.S. refineries. The dollar-denominated RTS Index jumped 4.8 percent, the second-biggest advance globally among 93 equity indexes tracked by Bloomberg. OAO Lukoil jumped 3.2 percent in Moscow.

Fundraising Plan

Russia, which gets about 50 percent of state revenue from oil and gas, has missed fundraising targets in the past two weeks amid the threat of new sanctions over the conflict in Ukraine. The nation’s budget deficit will reach 2.5 percent of economic output in 2015, according to the median of 20 estimates in a Bloomberg survey.

At its first sale of floating-rate notes last week, the government placed only half of the 5 billion rubles of December 2017 notes offered. Russia will seek double that amount on Wednesday, the biggest sale of government OFZ debt since November.

“The background for the OFZs is super positive,” Yury Tulinov, the head of research at PAO Rosbank in Moscow, said in e-mailed comments. “Now investors will probably take any note, unless the Finance Ministry is very greedy” by pricing the debt below market rates, he said.

Helping offset the blow from oil’s drop, the weaker ruble boosted the size of Russia’s rainy-day fund, which is invested in foreign assets, by 919 billion rubles ($13.76 billion) last month.

Bond Rally

Russian bonds have climbed since the key rate was lowered to 15 percent from 17 percent. The five-year yield declined 48 basis points on Tuesday to 14.07 percent, the lowest since Dec. 12. Contracts insuring Russian debt against default for five years fell for a second day, dropping 48 basis points to 564.

That remains the fourth-riskiest globally, according to data compiled by Bloomberg, after Standard & Poor’s cut Russia’s foreign-currency credit rating to junk last week. The ruble has slumped 47 percent against the dollar in the past 12 months after the U.S. and its allies imposed sanctions on Russia over its alleged support for Ukrainian separatists following the annexation of Crimea in March.

A Ukrainian separatist leader on Monday ordered a military mobilization as the conflict with government forces escalated after peace talks failed to secure a truce. The European Union threatened last week to level new penalties on Russian individuals and companies.

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