Ruble Level That Shocked Markets Year Ago Now Cause for Relief

  • Russian budget seen needing weaker ruble to offset oil slide
  • With $35 oil, ruble needs to be 94/dollar for budget: BofA

Exactly 12 months after Russia stepped in to halt the ruble’s collapse as it slumped to record lows, the currency is once again trading near its trough.

This time around, policy makers can breathe easier.

In fact, the government would benefit from a bigger depreciation as oil’s retreat toward $35 a barrel puts its budget-deficit target further out of reach. According to research by Bank of America Merrill Lynch, the ruble would need to slide to 94 per dollar for Russia to keep the fiscal gap in check if that crude price persists, compared with just above 70.

The crisis on Dec. 16, 2014 was sparked as a domestic dollar shortage caused by sanctions, slumping oil and the military conflict in eastern Ukraine collided, sending shock waves worldwide. As panic seized the markets, the exchange rate tumbled rapidly past 70 and then 80, and it took an emergency interest-rate increase and Russia pumping dollars into banks to subside.

Now the currency isn’t falling fast enough to keep up with crude, leaving Russia with the least earnings in five years from each barrel it exports.

"While the lower oil price is very negative by itself, it’s not as critical as a year ago," said BofA economist Vladimir Osakovskiy, who projects oil will eventually recover to average $50 a barrel in 2016, giving the ruble room to strengthen to 65 per dollar. The government and central bank will need to bridge the budget gap "through some weakness of the ruble on one hand, but also some spending cuts on the other hand," he said.

The currency has weakened 6 percent in December to 70.48 per dollar by 7:41 p.m. in Moscow versus a 16 percent retreat in Brent crude, which is used to price Russia’s main export blend. Brent in ruble terms dropped to 2,622 Wednesday, the lowest since 2010, compared with a 2016 budget based on 3,165 for each barrel of Urals, according to Bloomberg calculations.

All this math points to a bigger budget shortfall than the 3 percent target President Vladimir Putin has committed to achieving, and therefore poses risks to Russian assets in the coming year, according to Nomura Holdings Inc.

The Reserve Fund earmarked for covering fiscal gaps fell by 21 percent in 2015 to 3.93 trillion rubles ($56 billion) at the end of November. That stash will be virtually wiped out next year unless the currency depreciates more quickly, Nomura said last month.

Russian bonds have fallen in December, with yields on five-year debt climbing 21 basis points to 10.24 percent. The ruble is on course for its third straight annual slide.

“Sub-35 a barrel oil is going to add another leg of weakness to the Russian credit story,” said Timothy Ash, head of emerging-market strategy at Nomura in London. “Eventually the finance ministry will be forced to act if oil prices stay low for longer, which seems likely.”

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