Ruble Outpaces Oil Gains as Best Month Since April Dents Revenue

  • Currency's correlation with Brent oil has declined to 0.8
  • Crude in ruble terms has dropped to lowest in a month

The ruble extended its best month in almost a year and outstripped gains for crude oil amid a wider rally in emerging-market currencies, raising the possibility Russia may find it harder to fund its budget.

The Russian currency strengthened 2 percent to 66.8980 against the dollar by 5:19 p.m. in Moscow, bringing its gain for March to 12.3 percent, the best monthly advance since April 2015. The ruble’s appreciation outpaced a 10 percent rally for Brent crude in the month, a decoupling that’s pushing the oil price in ruble terms to a one-month low.

A stronger ruble alongside oil below $40 a barrel implies a double effect of lower export revenue and an inferior conversion rate into the currency in which the government pays its domestic bills. Russia, which depends on oil and natural gas exports for almost half of its revenue, is forecast to post a fiscal shortfall of 3.8 percent of economic output this year, the widest since 2010, according to the median estimate in a Bloomberg survey of 29 analysts.

“The government will have a hard time balancing the budget if the ruble continues to outperform oil,” said Alexei Egorov, an analyst at Moscow-based Promsvyazbank OJSC, which had the second-most accurate ruble forecast for 2015. “The ruble is decoupling from the oil price following the optimism in emerging markets caused by Yellen’s comments."

Lower Correlation

Driving the ruble’s gain is a broader advance in emerging-market currencies following comments by Federal Reserve Chair Janet Yellen earlier in March expressing caution over raising interest rates. The prospect of higher borrowing costs in the U.S. often pressures developing-world currencies by luring investors to dollar assets with the prospect of better returns for less risk.

The 30-day correlation between the ruble and Brent has dropped from a record high reached earlier in March to 0.8 on Thursday. A reading of one would mean the two assets move in lockstep. Brent in rubles fell 0.5 percent on Thursday to 2,666, which compares with the 3,165 average Urals price that the budget for 2016 is based on.

Brent fell as much as 1.3 percent to $38.74 a barrel, before recovering, set for a 1.5 percent drop this week. The Micex Index of Russian stocks was steady at 1,868.89. Five-year bonds were little changed at 9.23 percent.

Some analysts warned the financial strain on Moscow may be short-lived, expecting an imminent reverse of the oil price decline.

“The drop in oil prices will be temporary,” said Koon Chow, a senior macro and currency strategist at Union Bancaire Privee in London. “I think most people realize this and therefore are unworried by some oil price drops."

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