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Russia Primes $150 Billion Wealth Fund as Oil War Hits Ruble

Russia Readies Ruble Support as Currency Sinks in Offshore Trade

(Bloomberg) --

Russia is girding for a protracted oil-price war and may dip into its $150 billion wealth fund to bolster the ruble as the currency of the world’s biggest energy exporter slumps the most globally.

In emergency measures announced Monday, the Finance Ministry said it may start to sell foreign currency if oil prices stay below $42.40 per barrel, the cutoff level for the so-called budget rule that’s helped stabilize the ruble. The currency plunged 8% against the dollar in offshore trading to its weakest level since early 2016. Crude lost a third of its value to almost $31.02 per barrel after cooperation talks with OPEC broke down and Saudi Arabia launched a pricing war.

Russia Primes $150 Billion Wealth Fund as Oil War Hits Ruble

Russia’s oil-wealth reserves in the National Wellbeing Fund are “sufficient to cover lost revenue if oil prices drop to $25 to $30 a barrel for six to ten years,” the Finance Ministry said in its statement. Goldman Sachs Group Inc. predicted Brent could quickly dip into the $20s if the price war intensified.

Assurances from the Finance Ministry and separately from the Bank of Russia failed to shore up the ruble in offshore markets and some analysts predicted the currency’s collapse could go deeper when domestic trading reopens after federal holidays on Monday.

“The measures announced by the Russian central bank and the finance ministry will not prove sufficient to stabilize the ruble as long as oil continues to fall and concerns about the coronavirus are rising,” Piotr Matys, a strategist at Rabobank in London, said by email. “A weaker ruble will help to offset some of the negative impact of lower oil prices, but it may also have negative inflationary consequences and may undermine sentiment amongst Russian households.”

The central bank announced measures of its own, and said for 30 days it will stop selling rubles to buy foreign currency under the government’s budget rule, which was designed to reduce the currency’s vulnerability to swings in oil prices. Policy makers stand ready to use “additional instruments in order to ensure financial stability,” it said in a website statement.

That could include an emergency 50 basis-point rate increase, which would bring an abrupt end to the central bank’s run of cuts, according to Oxford Economics’ Evghenia Sleptsova.

The ruble traded 8.1% weaker offshore at 74.5892 per dollar as of 4:41 p.m. in Moscow, poised for its biggest collapse since the nation’s currency crisis in December 2014. That month, with crude prices tumbling, the Bank of Russia was forced to hoist rates 650 basis points.

“This is probably not the end of the ruble sell-off,” said Tatiana Orlova, an economist at Emerginomics in London.

The currency could weaken beyond 85 per dollar when the local market opens Tuesday, at which point verbal intervention from the central bank “looks likely,” she said. Some ruble weakness can be absorbed because inflation is near a record low, and a rate hike would only be deployed if the ruble moves rapidlybeyond 90 per dollar, she said.

Market Snapshots:

  • The yield on Russia’s 2047 Eurobond spiked 30 basis points to 3.66%, the sharpest increase on a closing basis since the debt was sold in June 2017
  • An index tracking the performance of Russian companies’ depositary receipts listed in London nosedived 18% to the lowest since August 2017
Russia Primes $150 Billion Wealth Fund as Oil War Hits Ruble

Under Russia’s budget rule, all extra oil and gas revenue above $42.40 goes into the ministry’s National Wellbeing Fund, with the central bank buying foreign currency from the market. If the oil price falls below that level, the lost revenue will be compensated by the wellbeing fund and the corresponding amount of foreign currency will be sold on the market, the Finance Ministry said. The ministry also indicated it may skip its weekly auctions of domestic bonds depending on market conditions.

--With assistance from Maria Kolesnikova.

To contact the reporter on this story: Andrey Biryukov in Moscow at abiryukov5@bloomberg.net

To contact the editors responsible for this story: Torrey Clark at tclark8@bloomberg.net, Alex Nicholson

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