Russia Will Halt the Ruble’s Slide and Keep Pumping Oil

Why Russia Will Halt the Ruble’s Slide and Keep Pumping Oil

By Marin Katusa, Chief Energy Investment Strategist

The harsh reality is that U.S. shale fields have much more to fear from plummeting oil prices than the Russians, since their costs of production are much higher, says Marin Katusa, author of The Colder War: How the Global Energy Trade Slipped from America’s Grasp.

Russia’s ruble may have strengthened sharply Wednesday, but it’s plunge in recent days has encouraged plenty of talk about the country’s catastrophe, with some even proclaiming that the new Russia is about to go the way of the old USSR.

Don’t believe it. Russia is not the United States, and the effects of a rapidly declining currency over there are much less dramatic than they would be in the U.S.

One important thing to remember is that the fall of the ruble has accompanied a precipitous decline in the per barrel price of oil. But the two are not as intimately connected as might be supposed. Yes, Russia has a resource-based economy that is hurt by oil weakness. However, oil is traded nearly everywhere in U.S. dollars, which are presently enjoying considerable strength.

This means that Russian oil producers can sell their product in these strong dollars but pay their expenses in devalued rubles. Thus, they can make capital improvements, invest in new capacity, or do further explorations for less than it would have cost before the ruble’s value was halved against the dollar. The sector remains healthy, and able to continue contributing the lion’s share of governmental tax revenues.

Nor is ruble volatility going to affect the ability of most Russian companies to service their debt. Most of the dollar-denominated corporate debt that has to be rolled over in the coming months was borrowed by state companies, which have a steady stream of foreign currency revenues from oil and gas exports.

Russian consumers will be hurt, of course, due to the higher costs of imported goods, as well as the squeeze inflation puts on their incomes. But, by the same token, exports become much more attractive to foreign buyers. A cheaper ruble boosts the profit outlook for all Russian companies involved in international trade. Additionally, when the present currency weakness is added to the ban on food imports from the European Union, the two could eventually lead to an import-substitution boom in Russia.

In any event, don’t expect any deprivations to inspire riots in the streets of Moscow. Russian President Vladimir Putin’s popularity has soared since the beginning of the Ukraine crisis. The people trust him. They’ll tighten their belts and there will be no widespread revolt against his policies.

Further, the high price of oil during the commodity supercycle, coupled with a high real exchange rate, led to a serious decline in the Russia’s manufacturing and agricultural sectors over the past 15 years. This correlation—termed by economists “Dutch disease”—lowered the Russian manufacturing sector’s share of its economy to 8% from 21% in 2000.

The longer the ruble remains weak, however, the less Dutch disease will rule the day. A lower currency means investment in Russian manufacturing and agriculture will make good economic sense again. Both should be given a real fillip.

Low oil prices are also good for Russia’s big customers, especially China, with which Putin has been forging ever-stronger ties. If, as expected, Russia and China agree to transactions in rubles and/or yuan, that will push them even closer together and further undermine the dollar’s worldwide hegemony. Putin always thinks decades ahead, and any short-term loss of energy revenues will be far offset by the long-term gains of his economic alliances.

In the most recent development, the Russian central bank has reacted by raising interest rates to 17%. On the one hand, this is meant to curb inflation. On the other, it’s an direct response to the short selling speculators who’ve been attacking the ruble. They now have to pay additional premiums, so the risk/reward ratio has gone up. Speculators are going to be much warier going forward.

The rise in interest rates mirrors how former U.S. Fed Chair Paul Volcker fought inflation in the U.S. in the early ‘80s. It worked for Volcker, as the U.S. stock market embarked on a historic bull run. The Russians — whose market has been beaten down during the oil/currency crisis — are expecting a similar result.

Not that the Russian market is anywhere near as important to that country’s economy as the US’s is to its. Russians don’t play the market like Americans do. There is no Jim Kramerovsky’s Mad Money in Russia.

Russia is not some Zimbabwe-to-be. It’s sitting on a surplus of foreign assets and very healthy foreign exchange reserves of around $375 billion. Moreover, it has a strong debt-to-GDP ratio of just 13% and a large (and steadily growing) stockpile of gold. Why Russia will arrest the ruble’s slide and keep pumping oil

And there is Russia’s energy relationship with the EU, particularly Germany. Putin showed his clout when he axed the South Stream pipeline and announced that he would run a pipeline through Turkey instead. The cancellation barely lasted long enough to speak it before the EU caved and offered Putin what he needed to get South Stream back on line. Germany is never going to let Turkey be a gatekeeper of European energy security. With winter arriving, the EU’s dependence on Russian oil and gas will take center stage, and the union will become a stabilizing influence on Russia once again.

In short, while the current situation is not working in Russia’s favor, the country is far from down for the count. It will arrest the ruble’s slide and keep pumping oil. Its economy will contract but not crumble. The harsh reality is that American shale fields have much more to fear from plummeting oil prices than the Russians (or the Saudis), since their costs of production are much higher. Many US shale wells will become uneconomic if oil falls much further. And it they start shutting down, it’ll be disastrous for the American economy, since the growth of the shale industry has underpinned 100% of US economic growth for the past several years.

Those waving their arms about the ruble might do better to look at countries facing real currency crises, like oil-dependent Venezuela and Nigeria, as well as Ukraine. That’s where the serious trouble is going to come.

The collapse in oil prices is just the opening salvo in a decades-long conflict to control the world’s energy trade. To find out what the future holds, specifically how Vladimir Putin has positioned Russia to come roaring back by leveraging its immense natural resource wealth, click here to get your copy of Marin Katusa’s smash hit New York Times bestseller, The Colder War. Inside, you’ll discover how underestimating Putin will have dire consequences. And you’ll also discover how dangerous the deepening alliance between China, Russia and the emerging markets is to the future of American prosperity. Click here to get your copy.

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Golden Oxen
Golden Oxen

While the current instability and just what is going on is very confusing, those talking about Russia as if it were a Banana Republic are misguided in my view.

The mineral wealth of Russia is so impressive and vast, that it is difficult to imagine the country not having a strong rebound from it’s current problems.

The alliance of the Big Bear and Dragon are also positives for Russia’s long term economic outlook.

Let’s not forget those thousands of nuclear warheads either.

Westcoaster
Westcoaster

Re: GO, I agree and isn’t Russia’s debt to GDP something like 20%? Compared with the U.S. it’s very low.

Tucci78

“In the most recent development, the Russian central bank has reacted by raising interest rates to 17%. On the one hand, this is meant to curb inflation. On the other, it’s an direct response to the short selling speculators who’ve been attacking the ruble. They now have to pay additional premiums, so the risk/reward ratio has gone up. Speculators are going to be much warier going forward.”

———–
Hm. The fact that Putin and his coterie of kleptocrats have screwed the Russian economy (those “speculators” are causative of ruble’s crash-and-burn the way flies cause garbage) and this extraordinary jack-up in the Russian government’s central bank prime lending rate gives EVERYBODY in the global financial markets extraordinary cause to regard the situation in Putin’s jurisdiction as massively clusterfucked.

This isn’t just a little blood in the water drawing a few sharks. This is misgovernment on a catastrophic scale, as exemplified by Putin’s efforts in Ukraine both to preserve an utterly non-viable Russian economic hegemony in the region (the reason for the popular desire in the Ukraine over the past several years to seek stronger economic ties with the European Union and leave Putin’s predatory ambit) and to “wag the dog” among the Russian population by appealing to their paranoia-laced excuse for patriotism.

Ugh
Ugh

Tucci78 – Hilarious post! Well done! Hegemony – what a hoot!

backwardsevolution
backwardsevolution

Tucci78 – “That deaf, dumb and blind kid sure played a mean pinball.” Bet you’re a great player.

Mark
Mark

This article is an example of Krugmanist propaganda. Create multiple logically fallacies to distract the reader.

Yeah, it’s good for for the effective 1 sole industry that my country exports to have its price drop by over 50%. Yeah, sure the workers in oil industry will work for a 1/3 their pay if still receiving the same amount of Rubles. Just what is their profit margin anyway?

The collapse of the Ruble has the potential to be Catastrophic for Russia. In effect isolate Russia in perpetuity if they eventually have to default.

Bea Lever
Bea Lever

ADMIN

My understanding is that Russia is 14% debt to GDP. USAUSAUSA! is 82% debt to GDP.

Russia has friends this time around, agree they will be ok, looks like we could use some friends.

WestChesterGuy
WestChesterGuy

Read George Friedman’s report of his recent tip to Russia here: http://www.stratfor.com/weekly/viewing-russia-inside#axzz3MLs0B9It. Here’s a quote from that same article: “Russians’ strength is that they can endure things that would break other nations”.

www.yahoo.co.uk

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