Ruble Rides Renewed Oil Liaison as Russia Looks the Other Way

(Bloomberg) -- What was supposed to be the ruble’s Achilles heel -- its heightened sensitivity to oil prices -- is just the thing that’s helping it recover from this year’s emerging-market turmoil.

The currency’s correlation with crude oil has more than tripled since the Bank of Russia suspended efforts aimed at weakening that link, allowing it to surge more than 2 percent in September on the back of a energy rally. Only last year, the central bank started regular foreign-exchange purchases under a budget rule to temper ruble volatility fueled by fluctuations in the cost of oil, Russia’s top export.

Ruble Rides Renewed Oil Liaison as Russia Looks the Other Way

“Removing FX purchases reconnects the ruble with oil that is at recent highs,” said Elina Ribakova, a fellow at the Bruegel think tank in Brussels and former EMEA research head at Deutsche Bank AG. “Without foreign-currency purchases and with oil at such highs, the ruble may gain the most compared with other emerging markets.”

The ruble is the best performer among developing-nation currencies over the past 30 days, buoyed by a rally of more than 7 percent in Brent crude prices. The Russian currency was around 65.95 per dollar on Wednesday. A measure of its 90-day correlation with oil prices has climbed to 0.33 from as low as 0.06 at the start of August.

Russia’s central bank suspended its foreign-exchange purchases last month to support the local currency, after it slumped almost 15 percent through the first eight months of the year amid a sell-off across emerging markets and concern that the U.S. may slap new sanctions on Russia.

Building Reserves

“The suspension of foreign-currency purchases is an important factor that allows the ruble to react to oil prices,” said Inan Demir, an economist at Nomura International Plc in London.

The Bank of Russia’s foreign-currency buying was on behalf of the Finance Ministry to build up reserves under a fiscal rule aimed at insulating the economy from volatility in oil prices. Under the rule, the ministry calculates amount of purchases based on the oil prices, with revenue when crude is above $40 a barrel transferred into sovereign wealth fund.

“In the last two-three months, when you saw the outright break of correlation of the ruble and oil, that was purely the sanctions,” said Viktor Szabo, a portfolio manager at Aberdeen Standard Investments in London. “And that’s why I expect ruble to appreciate: if that correlation is restored, the ruble can get stronger.”

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