Russia: Ruble plummets to four-year low in March as oil prices collapse
The Russian ruble dived further against the U.S. dollar in recent weeks, stricken by collapsing global oil prices and a worsening economic backdrop amid the Covid-19 pandemic. On 3 April, the ruble ended the day at 76.6 per USD, down 13.6% from the same day last month. Furthermore, the RUB depreciated 19.1% against the USD in year-to-date terms and was down 14.8% from the same day of last year.
Evaporating oil demand due to the coronavirus pandemic and soaring global production amid an ongoing price war between Saudi Arabia and Russia hammered global oil prices over the past month and sent the ruble crashing to an over four-year low of RUB 80.9 per USD on 18 March. Moreover, rising fears that the fallout from the virus may push the Russian economy into contraction in the coming months sent investors bolting towards safe-haven assets, thus further depressing the RUB. As a result, the Central Bank intervened by launching foreign currency sales for the first time in five year and suspended its purchases of foreign currency for at least 30 days. On top of that, the Bank paused its monetary policy easing cycle on 20 March in order to further stabilize the currency.
Commenting on the Central Bank’s measures to contain the ruble deprecation, Dmitry Dolgin, chief economist at ING, noted:
“The decision to step up the FX interventions beyond the requirements of the fiscal rule represents a response not to the oil price drop, but rather to the massive global run into USD assets seen […] Additional FX liquidity from the Russian central bank may address RUB’s higher volatility relative to its EM peers […] FX interventions will not remove RUB’s sensitivity to the oil price, but may somewhat lower it from the current 1 USDRUB move per $2/bbl.”
Going forward, a rapidly worsening global economic backdrop at the outset of Q2 is set to continue weighing on the RUB, as the domestic economy nears recession and foreign demand for exports dries up. More positively, however, Russia and Saudi Arabia seem to be nearing an agreement on oil production cuts, which should take some pressure off oil prices, and thus prop up the ruble. That said, the Covid-19 pandemic will likely prevent a meaningful RUB recovery in Q2, as agreed by Dmitry Dolgin:
“We see high risk of volatility in the near-term, as both expectations on oil supply and demand are subject to a great deal of uncertainty related to foreign policy tensions and the Covid-19 outbreak. According to ING’s house view, Brent may still drop to US$20/bbl in 2Q20 before seeing some recovery in 2H20. Based on this, we still see high risk of USDRUB entering the 80-85 range in 2Q20. However, for 2H20 we are more optimistic for several reasons. In addition to expected stabilisation of the oil prices, RUB could benefit from the likely drop of imports of goods and services, lower dividend outflow, as well as FX sales under the fiscal rule and no extra pressure from local capital flows. As a result, for now as a base case we keep our expectations of USDRUB 70-75 by the year end.”