Russia Locks In on What’s Wrong With Ruble During Oil Frenzyby
Interventions are back in play as ruble’s volatility in focus
Central bank hasn’t purchased foreign currency since mid-2015
Untethering the ruble helped Russia ride out the biggest oil downturn in a generation. But it’s left the world’s biggest energy exporter vulnerable to greater volatility in crude prices as OPEC pushes output cuts.
To address that, the Bank of Russia is preparing to wade back into the currency market after an 18-month absence and soak up foreign revenue earned in excess of the $40 oil price assumed in the budget. First Deputy Prime Minister Igor Shuvalov said in an interview last week that currency purchases are possible already at current oil prices. The exchange rate needs to be more “predictable,” Finance Minister Anton Siluanov said on Saturday.
“At this stage of economic recovery, Russia would benefit from a stable ruble rather than further potentially excessive appreciation, which could undermine the competitiveness of Russian exporters at the time when the global trade pie seems to be shrinking,” said Piotr Matys, an emerging-market currency strategist at Rabobank in London.
The ruble’s gallop since touching a record low a year ago has churned stomachs for the government, consumers and businesses alike, prompting the surprise announcement that interventions may be imminent, with JPMorgan Chase & Co. expecting them in “weeks not months.” The operations would help keep the ruble in check until the government implements a so-called budget rule from 2020, preventing it from spending surplus revenue above a pre-set oil price.
The central bank has said any purchases would be in line with its free-float regime, in place since late 2014, and possible intervention “for the purposes of budgetary, not monetary policy smooths the impact of oil-price fluctuations on the real exchange rate.”
At an average oil price of $50 a barrel, Russia will get an extra 1 trillion rubles ($16.8 billion) in revenue this year, the Finance Ministry estimates. Interventions, if they start in February and continue through the rest of the year, would reach $1.45 billion a month, according to Raiffeisenbank JSC. The Bank of Russia bought about $10 billion between mid-May and late July 2015.
With the intervention offsetting the effect of higher crude prices, the ruble would effectively be priced at an oil equivalent of about $43 a barrel, according to JPMorgan. Benchmark Brent, which is usually trading at about a $3 premium to Russia’s Urals blend, was near $55 in London on Monday.
“The policy will enable higher inflation-targeting credibility and isolate the economy from terms-of-trade shocks and Dutch disease problems,” JPMorgan analysts including Anatoliy Shal said in a report on Friday. “A good share of the risk premium is driven by oil-price volatility and oil-price uncertainty.”
A shale-industry revival in the U.S. is the reason top oil executives see volatility ahead. Higher prices after the Organization of Petroleum Exporting Countries decided to cut output late last year are helping swell U.S. production, which could put crude under downward pressure again. “And up and down,” International Energy Agency Executive Director Fatih Birol said in Davos last week.
The ruble has become less beholden to oil and more sensitive to shifts in capital flows and investor sentiment. It had its best-ever year in 2016, when it appreciated 20 percent, after losing half its value against the dollar in 2014-2015. The ruble climbed for the first time in four days on Monday, trading 0.6 percent stronger and extending its gain this year to more than 3 percent versus the U.S. currency.
“After the financial stress of 2014, society needs stability and predictability more than a strong ruble,” said Dmitry Postolenko, a money manager at Kapital Asset Management in Moscow. “The stable exchange rate allows economic agents and the government to build plans with greater certainty.”
One-year implied volatility on the ruble versus the dollar on Monday headed for the lowest level since early November. Still, the gauge of expected moves in the exchange rate over the next 12 months shows the Russian currency will be among the 10 most volatile in the world, according to data compiled by Bloomberg.
For every 1 ruble of appreciation in the exchange rate, the budget loses about 100 billion rubles at an average Brent price of $55 per year, Sberbank CIB estimates.
“When your income is in petro-dollars, but your expenditure is in rubles, you want to avoid volatility when your cushion is thin,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany. “Too-heavy movements in the exchange rate may cause yet another round of fiscal headaches.”