- 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
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
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
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
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.
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