Ruble-Watching Becomes an Oil Game One Year After Historic Floatby
Russian currency's correlation to oil hit a record in October
Bank of Russia switched to free float to preserve reserves
When Bank of Russia Governor Elvira Nabiullina stopped managing the ruble exchange rate a year ago, she tied it to the price of oil like never before.
Without central bank interventions to smooth the ruble’s swings, the correlation between the currency of the world’s biggest energy exporter and a barrel of crude reached a record in October and is about three times the level it was at the same time in 2014.
“Ruble forecasters now need to be oil-price forecasters as well,” said Tatiana Orlova, a senior economist at Royal Bank of Scotland Plc, who’s covered the country for eight years. “I spend about 50 percent more time reading oil-market analytics and political news on the relations between the West and Iran to understand where things may be going in the oil market.”
While the switch to a free-floating exchange rate has complicated Orlova’s job by making the ruble the most volatile currency in the world, the new policy protects the nation’s international reserves because the cash is no longer needed to support the ruble. It also keeps local-currency budget revenue steady even as the dollar price of crude changes.
The correlation between the ruble and oil prices climbed to a record 0.88 on Oct. 6. A reading of 1 would mean the two are trading in lockstep. Even at 0.68 on Thursday, they are still the most aligned among major oil-exporting currencies and the level compares with 0.22 on Oct. 27 last year, two weeks before the switch in ruble policy was announced. The Canadian dollar correlation is 0.52 and the Nigerian naira’s is 0.14.
On Nov. 10 last year, Nabiullina abandoned the practice of shepherding the ruble within a shifting exchange-rate corridor after policy makers burned through almost $90 billion of reserves in an attempt to slow the currency’s rout. With oil tumbling and companies locked out of western capital markets by sanctions over Ukraine, the ruble went into a nosedive, touching a record low of 80.10 per dollar on Dec. 16.
Even after the central bank’s dollar sales ended last year, the reserves extended their decline and sank to a low of $350.5 billion in April as the euro weakened against the dollar, shrinking the portion held in the shared currency. The Bank of Russia used a period of ruble strength to buy foreign currency and replenish its holdings, helping them advance 5.3 percent to $369.2 billion as of Oct. 30.
Iran is set to shake up oil markets next year as the end of U.S. and European sanctions opens the way for it to boost exports. The extra time Orlova spent reading up on the Islamic Republic’s multinational nuclear deal and the trajectory of U.S. crude stockpiles is paying off. Her ruble projections were more accurate than all but two of the 30 analysts surveyed by Bloomberg in the 12 months through Sept. 30. She sees the currency strengthening to 61.50 per dollar by the end of the year. The ruble traded 1.4 percent weaker at 66.347 against the dollar by 5:22 p.m. in Moscow.
Oleg Kouzmin, a former central bank adviser who works as an economist at Renaissance Capital in Moscow, maintains eight projections for the ruble and oil. A year ago, he used one.
“It’s useless to have only one base case,” Kouzmin said. “You could be talking to one client who believes in $60 per barrel and an hour later you’ll be talking to someone who believes in $40-per-barrel oil."
Brent fluctuated between a high of $82.38 per barrel and a low of $42.23 in the past 12 months. It dropped 2.4 percent to $44.72 in London on Thursday, taking its loss this month to 9.7 percent.
Things have calmed down on the ruble market since the peak of the turmoil in December. Implied three-month volatility, while remaining the highest in the world at 22 percent, is down from 57 percent at the end of last year. The discrepancy between ruble forecasts is also narrowing compared with December, when expectations for the exchange rate at the end of 2016 ranged between 44 and 84.93 rubles per dollar compared with a span of 50 to 75.85 now.
The correlation with oil will decline “to the extent that markets become comfortable with oil prices being range-bound and hence there being little incremental information in the daily move in Brent,” Clemens Grafe, chief Russia economist in Moscow at Goldman Sachs Group Inc. The ruble will appreciate “slightly” next year unless there’s another shock to oil, he said.
Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow has been spending a lot more time studying the oil market and says he prefers to crunch output and consumption statistics himself because he doesn’t trust oil analysts.
“Forecasting the ruble has become more difficult since volatility increased,” Losev said. “I would really like it it if the ruble finally untied itself from oil and the market started looking at more complex analysis."