Ben Aris in Moscow -
Russia’s ruble tumbled to a six-month low of RUB67 to the dollar and RUB75 to the euro on Thursday, as oil prices dropped yet again to $47 a barrel.
The fall in the ruble adds to the turmoil in emerging markets over the past week sparked by the depreciation of the Chinese renminbi. The ruble is also having a knock-on effect on other currencies. The Kazakh tenge also took a bath after the government moved over to a free floating regime. Other currencies in the Commonwealth of Independent States (CIS) are now likely to feel more downward pressure as most are tied to the fate of the ruble through economic and trade links.
The collapse of the ruble that began in December 2014 has been largely driven by a sustained fall in oil prices. The price of a barrel of the benchmark Brent crude fell to $47.22 per barrel on August 19, its lowest level since briefly touching $38 a barrel in the midst of the 2008-2009 crisis. Then the price of oil quickly recovered but this time round a consensus has emerged that oil will stay “lower for longer” amongst commodity analysts. That is bad news for the ruble.
“The whole point of a petrocurrency is that it follows the price of oil. Petrocurrency issuers are beginning to discover this. Painfully,” economist Frances Coppola said in a tweet.
The fall of the ruble should come as no surprise. Russia remains overly dependent on oil for both export and federal budget revenue.
But the Russian government has been wrong footed by the precipitous drop in the ruble, which is now approaching the lower band of predictions on where oil prices would go this year, made during the worst of the ruble crisis in December.
Russian Minister of Economic Development Alexei Ulyukayev predicted that the ruble would stay in the band of RUB50-RUB60 against the dollar “if there are no additional turbulences in the global capital markets”, the minister said in an interview to television channel "Russia 24" on July 28.
"We see now that there is a decline [of oil prices]: it is currently at $54 per barrel of our oil, the annual average price is $57,” Ulyukayev said during the interview. “If this dynamics is the same, then the exchange ratio will also be about today’s levels,” he said.
However, on August 20 he told Vedomosti: "The ruble is now near its fair value. It seems to me that it is very likely that oil prices will continue to decline, and that will lead to the continued depreciation of the ruble."
The ruble’s saving grace is the federal balance of payments has been holding up fairly well: falling oil prices take a big bite out of Russia’s hard currency earnings from exports, but the same fall in the ruble has also roughly doubled the cost of imported goods and imports have collapsed as a result. Further weakening in the ruble will only push imports down further. At the start of this year it looked like Russia would be left with some $60bn in its current account – about half the level of the pre-December currency rout – but Ulyukayev said a week ago that the economics ministry is now expecting a current account surplus of as much as $90bn at the end of this year.
Still, the ruble still is ahead of its exchange rates during the lows of December and part of the ruble’s fall is actually because of the rise gains of the dollar, which has rallied strongly this year. In year-to-date terms, the ruble's real effective rate is up by 14.2% as of August 18, gaining 18% since December 2014 to the euro and 4.3% to the dollar.
Light at the end of a very long tunnel?
Russia has been caught in the middle of the price war that has broken out between Saudi Arabia and the US: the Saudis hope to push down the price of oil and bankrupt US shale oil producers in the process. The key issue for Russia is how long this war will go on.
It can’t last forever. Saudi Arabia’s budget needs oil at about $70 and above to break even and the oil rich kingdom is now borrowing to plug a budget deficit hole that appeared in its national accounts. Likewise, there has been much speculation on at what point does the US shale oil sector start to be unprofitable, with the consensus coming in at about $60 per barrel. Neither side can keep this up forever, but both sides can keep it up for the foreseeable future.
“The dynamics of the energy markets changed notably as shale-oil production came onstream at a market-moving scale in 2013-2014, wrote Mohamed A. El-Erian, the former head of research at Pimco and now Chief Economic Adviser at Allianz, in a recent article.
“With this new source meeting more of world energy demand, particularly in the US, energy users were no longer as dependent on Opec and other oil producers. In the process, they also became less vulnerable to geopolitical concerns.”
El-Erian goes on to argue that as the US has replaced Saudi Arabia as the new swing state oil producer, the outlook for oil is more confused as the mechanism for transmitting changes in oil prices down to production and investment are a lot cruder in the US than they are in the highly centralised Arab kingdom, so price adjustments to changes in oil prices will take longer to work their way through. “Such fundamental changes in the supply side of the market naturally drove oil prices lower – a lot lower,” says El-Erian.
Moreover, on top of this battle, oil has also been pushed down by a clear slowdown in global economic growth, where the cooling of China’s economy and subsequent devaluation of the yuan last week is the most obvious manifestation.
Over time oil prices are bound to bounce back, says El-Erian, as despite the collapse in prices over the last eight months, global demand has been rising steadily since 2008 from about 84mn barrels a day to about 94mn barrels a day as of the end of last year, even if a gap between supply and demand opened up in December.
Low prices will inevitably reduce supply as the US producers cut production. On the other side of the coin, low oil prices will boost economic growth and hence the demand for oil. At issue is just how fast these tectonic forces will work.
“At the end of the day, no swing producer controls the fate of today’s oil prices,” says El-Erian. “A sustained price recovery requires a healthier global economy that combines faster inclusive growth and greater financial stability. And this will not occur quickly, especially given the policy shortcomings in both advanced and emerging countries.”
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