Central Asia, Global View

Oil price and management of the ruble’s influence from Moscow perspective

The Russian Federation wants its national currency to no longer act like a petrocurrency (national currency of a producing oil country which fluctuates directly proportional to the price of oil).

On 5 June 2017, Deputy Finance Minister Vladimir Kolychev declared that, as a result of the operations implemented by the Finance Ministry, the dependency of the national currency on the oil price decreased gradually. In February 2017, the Ministry started the purchase of foreign currency in accordance to the revenues brought to the federal budget from the transactions with oil and gas. Simultaneously, in January 2017, the National Bank of Russia was ready to intervene on the local markets by absorbing the excess currency bought with the $40 / barrel oil price considered in the budget forecast for this year.

A statistical perspective

1

Figure 1

Evolution of RUB/USD exchange compared to oil price

Source: Own analysis based on information from the database investing.com

 USD Channel

 Traditionally, there is an inverse relationship between the oil price and the dollar. For instance, when the value of the dollar decreases compared to other currencies, a higher amount of dollars will be necessary to buy the same quantity of oil and therefore the oil price expressed in dollars will rise. Inversely, when the dollar strengthens against other currencies, the oil price falls. Being considered a stable currency, the US dollar represents the reference currency for most commodities.

Therefore, the increase in value of the dollar is followed by a decrease of purchase power of other currencies (in this case, the Russian ruble) giving that a higher amount of a certain currency is needed to exchange it for a dollar. Thus, if the Central Bank of Russia does not intervene or there are not any events that may support the stability of the national currency, the ruble weakens against the dollar while the oil price decreases as well. This is valid inversely as well.

Trade Balance Channel

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Figure 2

Evolution of Russia’s current account compared to the oil price

Source: tradingeconomics.com

 

Russia’s economy is closely linked to the oil market. In 2016, the revenues of the federal budget for oil and gas transactions accounted for around 36% of the total.

The fall in the oil price (in USD) brings a fall in the value of exports. In the context of a strong US currency (as shown above), the imports are also affected, becoming more expensive.

The ruble will depreciate as a consequence of the following situations:

  • When exports decrease in value, the demand for rubles will decrease: the foreign importer has to make a cheaper payment, so the equivalent amount in rubles needed is reduced.
  • In the case of imports, when they increase in value, the national importer has to change the amount of rubles in the currency of the counterpart, therefore, the offer will increase.

As a result, there are changes in supply and demand for rubles – the demand for rubles decreases simultaneously with the increase in supply – which leads to a depreciation of the ruble.[1]

Impact recorded in recent years

 In May 2017, a few days before the meeting of the members of the Organization of the Petroleum Exporting Countries (OPEC), the oil price was already rising. West Texas Intermediate (WTI) oil, which is used as a standard in fixing the oil price, rose 1%, to        USD 51.16 / barrel. Simultaneously, the ruble increased by 0.4%.

In 2016, Russia’s federal budget (50% covered by oil and gas revenues) was designed taking into account an estimated oil price of USD 50 / barrel. However, at the beginning of 2016, the oil price was at USD 30 / barrel, which led to concerns of economists, including the Finance Minister of that period, remembering the collapse of the ruble in 1998.

The crisis that Russia has faced since 2014 was caused, among other things, by the collapse in oil prices. During that year, the ruble depreciated by more than 40%.

Estimations on the evolution of the ruble in the international financial market

The evolution of the ruble does not only affect the national economy of the Russian Federation, but also the countries with which Russia has trade relations, especially those in the Commonwealth of Independent States (CIS).

In August 2017, on the Chicago Stock Exchange, short positions for futures[2] and options[3] on the USD/RUB exchange rate increased by 30%. This indicates that another ruble decline is likely to happen. Also, in the relationship with the US dollar, analysts expect a depreciation of the Russian national currency. This emerges as a consequence of the monetary policy that the Federal Reserve System (FED) pursues. The increase in the monetary policy interest rate will  lead to the strengthening of the dollar’s position on the financial markets.

However, the depreciation of the national currency does not represent a negative aspect for the economy of a state. In the case of the Russian Federation, the economy is export-oriented which is favorable in the context of a weaker national currency. For the Russian companies that have commercial relations in USD, it is recommended to use derivative instruments that encourage more advantageous foreign currency purchases at a certain future maturity (for example: long forward or long call on the USD / RUB exchange rate). Also, individual investors from all over the world who focus on currency speculation can benefit from a fall in ruble by strategies that involve short positions on the USD / RUB currency pair at a later time.

However, in the current economic and political context, we can estimate that the ruble may be stable in relation to other foreign currencies, considering the oil as one of the main factors related to the Russian currency. There is a high likelihood that oil price fluctuations will not have the same impact on the exchange rate due to the interventions of National Bank of Russia mentioned before.

 

[1] Source: http://www.colorado.edu/economics/courses/econ2020/section13/section13-main.html

[2] A futures contract is a legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price and a specified time in the future.

[3] An options contract is an agreement between two parties to facilitate a potential transaction (buy – CALL option, sell – PUT option) on the underlying security at a preset price, referred to as the strike price, prior to the expiration date.

.investopedia.com/terms/o/optionscontract.asp http://www.investopedia.com/terms/f/futurescontract.asp

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