Video

Ole Hansen
Stay updated on what’s happening with oil, gold and other raw materials. Join Saxo Bank Head of Commodity Strategy Ole Hansen as he explores the world of commodities and how fundamentals, geopolitics and other factors could influence prices. He also looks at market opportunities for both traders and investors.
Article / 17 February 2017 at 10:44 GMT

The rouble and the curse of Rosneft

Russia oil and gas expert
United Kingdom
  • The rouble has undergone an unexpected rally in the last week
  • Analysts have posited it is linked to the state's decision to start buying dollars
  • In a break with historical patterns, the rouble has decoupled from oil prices
  • Best explanation that Rosneft sold dollars to fund purchase of Bashneft 
  • Not the first time Rosneft has been linked to rouble movement 
russian central bank
Analysts have been puzzling over the rouble's rally in recent weeks — one explanation 
is that the Russian Central Bank has been coordinating with oil firm Rosneft, whose 
majority shareholder is the Kremlin. Photo: Shutterstock 

By Nadia Kazakova

After the Russian finance ministry announced its decision to start buying dollars on January 25, the consensus was that the impact on the rouble might be negligible. But, coupled with the government's unease over the rouble's strength, it was reasonable to suspect it could nudge the Russian currency lower against the dollar.

Instead, since February 7 (when the ministry bought its first daily $100 million on the forex exchange), the rouble has actually strengthened by 2.3% (as of February 16). It has also decoupled from the movement in the oil price (up 0.09% since February 7), and detached itself from the Russia-related shenanigans of the Donald Trump administration.

Relative performance of RUB:USD and 1-month Brent futures, re-based 
x
Source: www.rbc.ru, www.quandl.com

The Russian analytical community went into overdrive to explain the phenomenon.

One school of thought was that official dollar purchases are having a strengthening rather than a weakening effect on the Russian currency. The argument goes as follows: the purchased US dollars increase forex reserves, thereby creating a larger safety net for the rouble. 

As the Russian government does not spend forex reserves when oil prices are weak (it is financed by the central bank via the printing press), the reserves will continue to rise regardless of oil price levels. Hence, it is good for the rouble in the long run and that is being priced in.

That might be the case. However, the Russian central bank might not hesitate to use its forex reserves by lending them out directly to banks or indirectly to large companies when the oil price drops. So much for the safety net. 

Another argument, simply stated, is that the rouble is relatively undervalued compared to oil price levels. That might be the case on a 12-month basis, but not, for example, on the 24-month view. 

Relative performance of RUB:USD and 1-month continuous Brent futures, x
x Source: www.rbc.ru, www.quandl.com

The leveraged money managers continue to hold on to long positions in the rouble, but they have been cut back from recent peaks. The hedge funds might become even less enthusiastic after less of a pro-Russian tilt of the Trump administration. 

Table. Leveraged money managers' position in the rouble, contracts
x
Source: www.cftc.gov, www.rbc.ru 

The most plausible explanation for the unusual move in the rouble was flagged by Sberbank analysts. They believe that Rosneft might have been selling US dollars to pay up to RUB64 billion ($1.1 billion) to buy out minorities of Bashneft by February 16. Rosneft's representatives denied that the company might have affected the rouble levels. 

Theoretically, this is not a large amount of money for the Moscow forex exchange, which has a daily dollar turnover of around $5 billion. It seems, however, that Russian banks are reluctant to take short-term speculative positions on the forex market, which makes it extremely sensitive to any new or unusual forex flows. 

In other words, it might be a struggle to sell (or buy) $1 billion on a whim within a week in Russia. It should ring a few alarm bells.

It is also worth noting that the central bank, which keeps a very watchful eye on the rouble, might have decided to step back and do nothing over the last week. It could have coordinated the sale of forex with Rosneft, keep the rouble steady and the markets calm and ignorant. 

Instead, it seems, the bank let the rouble appreciate and let Rosneft lose some money (if the rouble resumes its depreciation henceforth). 

It might not be the first and most likely not the last time that the markets could link peculiar movements in the Russian currency with Rosneft. Unfortunately, it is nigh on impossible to figure out when the Rosneft curse might strike again.

rosneft
 Russian president Vladimir Putin met with Rosneft CEO Igor Sechin in December to congratulate him on the purchase of Bashneft. Photo: kremlin.ru

– Edited by Jack Davies

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector

Relevant articles for you

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail