Yesterday Russia suffered the biggest one-day decline in its currency since its 1998 financial crisis. This morning, however, it’s stronger. Have we seen the worst?
At one point yesterday the rouble fell to 53.86 to the dollar, down 6.5% for the day, having stood at around 35 to the dollar as recently as July. At the time of writing, it had rallied to 51.13, according to xe.com.
The decline in the ruble illustrates broader problems in the Russian economy. The most obvious cause of both is the decline in the oil price, which has fallen 40% since June and has roughly coincided with the ruble’s disintegration.
Russia is enormously reliant on oil revenue – more than half of its budget revenues for 2013 came from oil and gas, according to BAML – and any likelihood of a revival appears to have been scuppered by the decision by OPEC last week not to cut output, which is the standard approach when oil producers want oil prices to rally.
Now, Russia’s central bank is working on an assumption of an oil price of $60 per barrel (West Texas Intermediate was at $69 this morning, and Brent Crude $72.54), according to comments given to Russia’s news agencies by Ksenia Yudaeva, the deputy chairwoman of the bank.
© Provided by Forbes What does a weak currency mean for Russia? As an exporter, it ought to be good. An exporter of oil and gas in particular, like Gazprom or Rosneft, earns in dollars and has expenses in rubles, so that’s a good thing. But on the negative side, a lot of…
And oil is only part of the problem. As this column has repeatedly discussed, Russia faces a confluence of problems, some of its own making, others not. Most obviously, it is under sanctions from the US and EU because of its behaviour in Crimea and Eastern Ukraine.
Additionally, it faces structural problems in the economy, is entering recession (or at the very least an expected period of zero growth), and has a debt burden that a falling ruble is going to make much worse.
What does a weak currency mean for Russia? As an exporter, it ought to be good. An exporter of oil and gas in particular, like Gazprom or Rosneft, earns in dollars and has expenses in rubles, so that’s a good thing.
But on the negative side, a lot of foreign debt is falling due – $31 billion in December, according to the central bank, and $98 more during 2015 – which will be much more difficult to repay for the Russian banks and companies who owe in dollars but earn in rubles.
Furthermore, the atmosphere for investment in Russia – portfolio or direct – is becoming increasingly toxic as it appears that everyone bar China is losing faith in the country’s prospects and investment case.
But how much worse can it realistically get? Oil prices can’t fall forever: the world’s industrial machine just doesn’t work like that. Deutsche Bank, for example, is calling oil prices to stay in a range around US$80 to US$90 per barrel.
This, the bank says, is a range that is positive for global growth (adding 0.2 to 0.4% to global GDP in 2015), benefiting oil importers like Turkey and South Africa; and, though it says Russia and Venezuela will be the biggest losers, that forecast range appears to be considerably higher than Russia is now using as the basis for its budget. If that’s correct, then both the oil price and Russia should expect a modest rebound.
As ever, opportunist portfolio managers on both the debt and equity side are trying to pick the right moment to buy into Russian assets, which are considerably cheaper than those in many peer markets.
There is, perhaps, a sense that declines in the past week have been overdone, but that only leads to a second question: even if there’s a bit of a relief rally now, does that mask a bigger fall just around the corner?