Oil Ruble
Shall the ruble rate always depend on the oil price?
In the course of the period since 2001 till 2014 we got used to the relative stability of exchange-value of ruble. Within almost 14 years rate was in the range of 25-35 rubles for one dollar, and changes in the amount of 1 ruble was perceived as significant event.
Events of the end of 2014 confirmed once again that habit is a bad criterion for forecasts. Collapse at the raw materials markets brought the ruble and Russian economy into new reality. But still, it is fair to say that falling in prices for raw materials hasn’t been predicted by any of large banks or internationals organizations.
In new existing reality ruble rate is rigidly connected with oil price, and change of its price for 1 USD leads to the change of the ruble for about 58 kopecks.
What has changed?
Let’s take 2013 as a starting point. At that moment it seemed, that economic situation in Russia is stable. Budget income was large, the state allowed itself to realize the projects, requiring significant financial investments, and Sochi Winter Olympic Games have become the largest of such projects.
Simultaneous collapse of prices for energy resources lead to the decrease of export by 54.9 bln USD per quarter. Non-energy resources export, primarily consisting of raw materials and low value added products (fertilizers, agricultural products) also decreased by 16.6 bln USD per quarter.
Loss of 71.4 bln USD per quarter is equal to the loss of 286 bln per year - and shall be an immense shock for any economy. Has Russia managed to adapt?
Import decreased by 47.5 bln USD, i.e. trade balance decayed by 23.9 bln USD. This amount is seemed to be impressive, but, at that, hardly anybody analyzes other components of current market non-debt exchange operations, united in the CB report against the current operations (see the box).
Russian began to spend less money for imported services by almost 10 bln USD (reduction of outbound tourism), besides earnings on non-residents and money transfers by migrant workers decreased by 15.7 USD.
In the result, current account were changed only by 3 bln rubles, and this was a plus side change. So, the system has found new balance point - rebalancing of trade balance didn’t lead to the change of current account.
Dynamics of current account, capital outflow and its difference
Why do we need Central Bank, if everything is decided by the market?
Perhaps, nowadays it is forgotten that before November 10, 2014, CB of Russia had a rule, which almost obliged it to sell 350 mln USD for each 5 kopecks decline in the ruble. Actually, before the attainment of equilibrium values in the end of 2014, CB had to spend almost 280 bln USD from its reserves.
So, this rule considerably affected the rate stability, and its cancellation lead to an immense increase of volatility at the market.
Beside the current operations, currency market is also influenced by capital transactions, divided into the following categories: investments into active assets, obtaining/repayment of credits and change of CB reserves.
In the existing CB statistics first three positions are combined and are reflected as capital outflow/inflow.
Quarterly capital outflow in the amount of 76 bln USD in 4 quarter of 2014 has become unprecedented for Russia. Analysis of the components of such outflow deserves a separate article. It may be expertly said, that in the 4 quarter of 2014 significant share of foreign speculative capital left Russia, besides foreign currency credits, which Russian companies and banks couldn’t refinance because of restrictions, imposed by the USA and EU, were cancelled.
Let us remind you of rather justified rumor, that Black Tuesday of December 16, 2014 was connected with Rosneft currency purchase for the settlement of its obligations.
So, despite the quick formation of the market rate, which balanced the current operations, CB had to use the reserves for capital outflow.
In the months, that followed, CB adopted the program on refunding of banks upon the security of foreign currency lending portfolio, and the remainder of foreign speculative capital at the Russian market in 2015 has become almost negligeable. In the result outflow significantly decreased in 2015. In the 3 quarter of 2015 we could even see a capital inflow in the amount of 3.4 bln USD.
Besides the decrease of outflow was also affected by combatting with tax dodging, as well as illegal withdrawal of funds from Russia, connected with it.
Financial experts often say, that expenses are being forgotten within several years and greed supersedes - investors begin to purchase risk assets in order to receive larger income. In permanently accelerating world people are inclined to see a stable tendency even more quickly.
Preservation of macroeconomic stability under severe conditions and relatively low foreign debt shall inevitably attract significant western investments, as soon as political restrictions are removed.
Conclusion: our expert opinion is the following - capital outflow will be significantly lower than that, we had before 2014, and it is quite possible that in some periods such outflow will be replaced by inflow. And current transactions balance shall be of fundamental importance for ruble rate formation.
Current transactions demonstrate movement of funds in the course of trading of Russian goods and services with other countries. It consists of trade balance, reflecting export and import of goods, service balance, consisting, primarily, of expenses for tourist trips, remuneration of labour (earnings of migrants, sent to their native states), investment income (form international investments, corrected by the revenue of non-residents in Russia), as well as rent and secondary incomes.
Shall the ruble rate always depend on the oil price?
Finally, we should answer the question, which was set in the very beginning of the article. Simultaneous change of prices for energy resources shall become a principal factor, influencing at current transactions, which is connected with energy resources’ predominance in the total volume of exports (60-70%).
Divergence of oil price trend with prices for other raw non-energy products may allow to decrease the correlation between the rate and oil price, but in so far as only 15% of the Russian export accrues for high-added value products, the rate will be highly dependent of the raw cycles.
According to our opinion, in the mid run, market capital investments wouldn’t be able to influence at oil-ruble connection. The only significant factors of capital investments shall include specific strengthening of CB reserves, as well as a new rule, developed by the Ministry of Finances - creation of reserves by means of foreign exchange earnings at oil price, exceeding 50 USD.
In both cases we may predict significant volumes of operations at the foreign exchange market by the government and CB, at that the rate, exceeding or equal to 60 rubles for 1 USD is to be attained, as well as restriction of further ruble strengthening even in case of growth of prices for energy resources. At that moment exchange value of ruble shall cease to be connected with oil, increasing in price...