Oil Sell-Off Rattling Ruble Set to Extend Russian Rate Pause

Updated on
  • Central bank reviews rates Friday as oil sell-off hits ruble
  • OPEC decision threatens to prolong global glut on oil market

The last time a December oil rout ravaged the ruble, Russia responded with an emergency rate increase. This year could be different.

Economists predict the Bank of Russia will extend a pause in its easing cycle at a meeting on Friday. The ruble plummeted to its weakest against the dollar since August following last week’s decision by OPEC that effectively abandoned output limits and sent oil to its lowest since 2009.

The world’s largest energy exporter adjusted to the worst commodities slump in a generation with spending cutbacks and by eventually allowing the ruble to weaken. The central bank burned through a fifth of its reserves to prop up the currency in 2014 and raised rates by 7.5 percentage points a year ago to stem the slide. Governor Elvira Nabiullina last month left open the possibility of holding borrowing costs on pause until March after five rate cuts brought the benchmark to 11 percent in July,  half a point short of unwinding the emergency move.

“This time around, we don’t expect the central bank to react with a rate hike if the ruble comes under strong depreciating pressure,” said Tatiana Orlova, a senior economist at RBS in London. “Rather, another oil sell-off would lead to a delay in its easing cycle. We also don’t expect at this stage that the central bank would provide much support to the ruble with verbal intervention.”

The ruble has slumped more than 11 percent since the last cut, hindering the central bank’s ability to aid an economy battling its first recession in six years. The Russian currency slumped about 2 percent against the dollar on Monday as Brent crude touched the lowest level since 2009.

“The central bank will act by keeping interest rates unchanged,” Piotr Matys, a strategist for emerging-market currencies at Rabobank in London, said by e-mail. That “should provide the ruble with at least some support.”

The Bank of Russia will hold rates unchanged on Dec. 11, according to 21 of 34 economists surveyed by Bloomberg, while 12 predicted a half-point cut and one forecast a reduction to 10 percent. Forward-rate agreements are signaling 45 basis points of cuts in the next three months, near the smallest move seen in more than a month.

Russian policy makers will meet as the Federal Open Market Committee is poised to raise U.S. interest rates for the first time since 2006 at its Dec. 15-16 meeting. Nabiullina has mentioned possible tightening in the U.S. as one of the biggest threats to Russia’s inflation outlook. 

Turkish Impact

Consumer-price growth, which slowed for a third month in November to 15 percent from a year earlier, is at risk of accelerating again after Russia imposed an import ban on Turkish goods from chicken to tomatoes. That may add as much as half a percentage point to inflation, Prime Minister Dmitry Medvedev said on state television Wednesday, citing analyst estimates.

Prices increased 0.2 percent in the seven days through Dec. 7 in the biggest weekly increase since early November, according to the Federal Statistics Service.

While Russia contends with above-target price growth, the European Central Bank last week unveiled a package of measures to tackle too-low inflation, from a cut in the floor for interest rates to an expansion of its bond-buying program. 

Nabiullina’s dilemma is similar to challenges in developing nations like Brazil, where the central bank signaled in late November that monetary tightening may return amid faster inflation even as the economy heads deeper into recession. India’s central bank left its rates unchanged Dec. 1 after four cuts this year to meet inflation targets that are starting to look more vulnerable.

$30 Oil

Oil has slumped 40 percent since Saudi Arabia led the decision by the Organization of Petroleum Exporting Countries in November 2014 to maintain output and defend market share against higher-cost U.S. shale producers. Crude prices at $30 would threaten the financial industry of Russia -- where the government relies on oil and natural gas for almost half of its budget revenue -- according to 15 of 27 respondents in a Bloomberg survey.

OPEC will keep pumping about 31.5 million barrels a day, President Emmanuel Ibe Kachikwu said Friday after a meeting in Vienna. The group is setting aside its output quota of 30 million barrels a day, a target it’s breached for the past 18 months, until members gather again in June.

Crude at $40 a barrel poses no major risks for the Russian budget and banks, Economy Minister Alexei Ulyukayev said in a televised interview on Monday. His ministry’s baseline forecast for oil prices to average $50 next year is “reasonable,” Ulyukayev said.

After Shock

“The Russian economy as a whole has adapted,” Ulyukayev said. “It’s passed this shock. We were able to significantly cut costs.”

Gross domestic product will contract 3.9 percent to 4.4 percent this year and may shrink as much as 1 percent in 2016 if oil stays at $50 a barrel, the central bank forecasts.

The cost in rubles of a barrel of Brent was 2,842 a barrel on Monday. That’s the lowest since December 2010 and below the average of about 3,300 rubles in the previous 12 months. The ruble’s three-month implied volatility is the highest globally at 20, according to data compiled by Bloomberg.

“We expect the ruble’s moderate weakening to continue,” said Vladimir Miklashevsky, a strategist at Danske Bank S/A. “Any strengthening would pose significant risks to the budget, which has been receiving fewer and fewer rubles due to the low energy prices.”

— With assistance by Andre Tartar, Zoya Shilova, and Henry Meyer

(Updates with prime minister's comment on inflation in ninth paragraph.)
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