Ruble Weakness Affords $100 a Barrel Recession Buffer

Russia is benefiting from a weaker ruble as oil stays above $100 a barrel, helping the nation weather the slowest economic growth in five years.
Output was stagnant in the second quarter after the government forecast a 0.1 percent drop, Deputy Economy Minister Andrey Klepach said July 9. That allowed Russia to dodge a recession as gross domestic product fell 0.5 percent in the first three months from the previous period.
While the ruble is 4.3 percent weaker against the dollar this year amid the fallout from the crisis in Ukraine, government coffers are benefiting from crude averaging about 17 percent more than the $93 a barrel used for budget planning. With bond yields dropping since May on signs the tension is easing, the latest economic data including the current account, should be supportive of flows continuing in the second half, according to Jan Dehn at Ashmore Group Plc.

“High oil coupled with the weaker ruble did help create a cushion for Russia” in the second quarter, Oleg Kouzmin, an economist for Russia and the Commonwealth of Independent States at Renaissance Capital Ltd. in Moscow, said by e-mail July 10. “The weaker ruble definitely helped Russia avoid recession.”

Fundamental Resilience

Russia’s current account surplus widened to $17.1 billion last quarter, almost 10 times larger than in the same period last year. Estimated net capital outflows declined to $25.8 billion in the same period from $48.8 billion in the first quarter, central bank data show.
“Russian sovereign credit fundamentals are among the strongest in the world,” Dehn, London-based head of research at Ashmore, which has about $70 billion in emerging-market assets under management, said by e-mail July 11. “Despite very negative sentiment during the Ukraine crisis, the Russian economy has once again shown its fundamental resilience.”
The yield on sovereign dollar bonds due in March 2030 has tumbled seven basis points since the end of May, compared with a five basis-point decline for the average emerging market sovereign bond yield, JPMorgan Chase & Co. data show.
Renaissance Capital on July 10 raised its 2014 current account surplus estimate by 30 percent to $56 billion following the “surprisingly strong” second-quarter data on “high” oil prices and a declining ruble, according to an e-mailed note.

Frozen Out

A weaker ruble is positive for the budget because oil, natural gas and other commodities are priced in dollars while Russian exporters pay taxes in rubles.
Russia was frozen out of the bond market in March following President Vladimir Putin’s incursion into Crimea. Since March 14, when the yield on the government ruble bond due February 2027 surged to a record, it has dropped 100 basis points to 8.71 percent on July 11. Russia held successful weekly OFZ auctions over the past two months.
“With slowing economic growth, a further central bank move to inflation targeting and, unfortunately, the unfinished geopolitical story around Ukraine, we think the improvement in the current account surplus will co-exist with continuing capital outflows,” Dmitry Polevoy, chief economist for Russia and CIS at ING Groep NV in Moscow, said in a July 9 note.

‘Upbeat’ Outlook

Ukrainian President Petro Poroshenko told German Chancellor Angela Merkel and U.S. Vice President Joe Biden on July 10 he was ready for truce talks with rebels if a monitoring system is put in place. Even so, the European Union added 11 names of people accused of destabilizing Ukraine to its sanctions list. The U.S. also said more sanctions are possible.
The ruble is forecast to slide to 35.70 per dollar by the end of the year, according to the average estimate in a Bloomberg survey. The currency weakened 0.3 percent to 34.3125 by 12:34 p.m. today.
“Although some risk of meaningful economic sanctions against Russia remains, tensions between Russia and Ukraine seem to have abated,” Tatiana Orlova, a London-based economist at Royal Bank of Scotland Group Plc, said by e-mail on July 10. “It’s too early to confidently say the worst is over, but the recent economic indicators look surprisingly upbeat.”