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Russia’s Finance Ministry has announced plans to hold foreign currency deposit auctions for Russian banks while the Central Bank plans foreign exchange repo transactions to prop up the national currency. But these measures are hardly likely to prevent the ruble’s further decline, if world oil prices continue to go down, experts said.
The downward trend on global oil markets have not yet affected the Russian stock market but revaluation of oil companies’ worth is near at hand, analysts said, adding this would happen after investment banks reviewed their long-term oil price forecasts.
The US currency rose to above 41 rubles to the US dollar on the Moscow Exchange on Wednesday amid rapidly declining oil prices. The ruble has been falling for seven consecutive trading sessions and the national currency has shed 2.6 rubles against the US dollar in the past four weeks.
The Bank of Russia’s foreign currency interventions have failed to rescue the ruble from its further decline: the regulator has spent almost $7 billion since the start of October on foreign currency interventions but the US dollar has grown by more than 1 ruble over this period. During a trading session on October 13 alone, the Bank of Russia spent almost $2.7 billion on foreign exchange interventions.The ruble’s devaluation follows a decline in world oil prices and the short-term prospects for the Russian currency depend on oil price dynamics, ING chief economist Dmitry Polevoi said in his survey.
The price of Brent crude has plunged by 26% since June 2014 when it was trading at $113 per barrel to $83.4 per barrel, the lowest level since 2010.
The level of oil prices affects Russia’s balance of payments as crude oil accounts for a third of the country’s exports, according to data of the State Statistics Service Rosstat. A fall in oil prices is reducing oil companies’ US dollar-denominated revenues and, as a result, pushing the ruble down.
The Russian regulator “will hardly oppose this trend of the falling ruble value due to weak fundamental parameters in the economy and is only trying to mitigate the fall,” Polevoi from ING said.
The Russian Central Bank is restraining the ruble’s fall with currency interventions. The Finance Ministry’s foreign currency deposit auctions for banks will come as another measure to prop up the national currency. “We have made a decision to organize foreign currency auctions and we’ll hold such foreign currency auctions soon,” Finance Minister Anton Siluanov said.
The finance minister said “sufficient foreign currency funds have accumulated on the Treasury’s accounts,” adding the ministry could offer “several billion US dollars” at foreign currency deposit auctions.
However, the Finance Ministry’s foreign currency deposit auctions alone will hardly remedy the situation on the foreign exchange market, “considering the level of stress experienced by the market,” the ING chief economist said.
At the same time, this measure coupled with the Central Bank’s plans to launch one-week and one-month foreign currency repo deals can create the ground for the ruble’s stabilization, he said.
A further fall in oil prices will be a new challenge for the ruble, VTB-24 investment department chief analyst Stanislav Kleshchyov said.
In the analyst’s estimate, the price of Brent crude may plunge to $75 per barrel. “The oil price has shifted to a lower trading band, which is as wide as $20. This has opened new horizons for speculators’ bearish strategies and they have used this opportunity,” the expert said.
Forecasts prepared by investment banks’ analysts for Brent prices in the coming four quarters are still staying in the range of $96-114 per barrel while their revision will prompt revaluation of oil companies’ worth and therefore, the stock and bond markets’ value, the expert said.
“This process [the oil price forecast revision] is round the corner, which may lower the targets for the oil sector’s equities. It should also be borne in mind that a review of a forecast on corporate financial results may both reduce equity prices and cause a revision of the credit quality of companies. And this means that the bond market will come under pressure,” the VTB-24 investment department chief analyst said.
Revaluation of oil companies’ worth following a plunge in world oil prices is a logical step, Renaissance Capital Chief Economist for Russia and the CIS Oleg Kuzmin said.
But a fall in the prices of Russian oil companies’ equities will be mitigated by the ruble’s depreciation against the US dollar because the companies mostly make expenditures in rubles, he said.
World oil prices started to fall sharply after the International Energy Agency (IEA) comprising the largest energy consumer countries revised down in mid-September its forecast on global oil consumption to 92.6 million barrels per day. The forecast revision caused Brent crude prices to fall to $100 per barrel. The oil prices continued to fall further and were trading at the level of $88 per barrel during the last few days.
The IEA published a new report on October 14, further cutting its oil consumption forecast to 92.4 million bpd, the lowest level since 2009. The report caused oil prices to plunge by more than $4 in London in one day.
Apart from the IEA’s lower oil consumption forecast, the rapid growth of the US dollar against the world’s major currencies is another factor affecting oil prices, which are denominated in the US currency, Capital Economics experts say.
The US dollar is rising amid fears of slower global economic growth and the expectations of a rate hike by the US Federal Reserve in September 2015.
Investors who have grown disillusioned with the prospects of investment on emerging markets and have failed to see eurozone economic recovery are now giving preference to US Treasury bonds (as a result, their yields have dropped to a 16-month low) and are quitting raw material assets. The US dollar index, which measures the value of the US currency relative to a basket of the world’ leading foreign currencies, has surged to a new 4-year high while the BBG Commodity Index has fallen to a five-year low, Capital Economics experts said.
Meanwhile, the threat of a “price war” within the OPEC group of petroleum exporting countries accounting for 40% of global crude supplies also plays a considerable role in oil price falls. The market is contracting and oil suppliers are beginning to compete with each other for a share in global oil sales.
Saudi Arabia, for example, has cut the price of oil under Asian contracts by $1.2 to $90.02 per barrel since October 1. Meanwhile, oil traders earlier told Platts energy news agency that an analysis of a futures market gave grounds to expect another round of cuts in Saudi Arabia’s selling oil prices by $0.7-1.0 per barrel.
The OPEC oil ministers are expected to meet in Vienna on November 27 where they may discuss oil output cuts to bring oil prices back to $100 per barrel.