Black Monday

The ruble is nosediving thanks to a coronavirus-triggered oil price collapse. Is Russia spiraling into another economic crisis?

On March 9, while Russian markets were closed following International Women’s Day, the value of the ruble on the online exchange Forex plummeted, leaving the Russian currency at 75 per dollar and 85 per euro. When the Moscow Exchange closed on Friday, it only took 68 rubles to buy a dollar and 80 to buy a euro. The prices of Russian stocks on the London Stock Exchange also took a nosedive today.

The ruble’s rapid depreciation was caused by a collapse in oil prices Monday morning: The cost of oil fell by 25 percent, the largest single-day change in the twenty-first century so far. Brent brand oil now costs less than $35 per barrel, bringing the price of oil below Russia’s budgetary rule — the lowest price officials assume when composing the country’s federal budget. This means the Russian government has shifted from accumulating reserves to spending them. However, the cause of the current price drop is also at Russia’s feet: Its government refused to support OPEC countries in their proposal to cut down oil extraction in order to stabilize prices. It is likely that the ruble’s current decline will continue, but how long the currency’s value continues to fall will depend on the length and severity of the global coronavirus outbreak. Dmitry Kuznets explains.

Is this just an economic scare, or is it a crisis?

Neither. Experts believe that when official markets open in Russia on March 10 (with their far larger numbers of buyers and sellers relative to London and Forex), the ruble’s decline will continue, as will the devaluation of Russian stocks. With oil prices as they are, a drop to 72 – 78 rubles per dollar is inevitable: When oil prices fall for an extended period of time, the ruble becomes 3 percent cheaper for every 10 percent decrease in oil markets. Since December 2019, oil has lost about half its monetary value, meaning that a drop in the ruble of 15 percent or more is simply to be expected. A corresponding outflux of foreign investors could exacerbate that fall. Within the past year, investors have actively bought up Russian bonds thanks to their high profitability, a result of current Central Bank monetary policy. Now, the drop in oil prices will lead most investors to sell out, trading their bonds for rubles that they can use to purchase dollars.

The central protective barrier holding off a further collapse in the ruble’s value is Russia’s conglomerate of economic institutions. The Central Bank had been buying rubles from the Finance Ministry on a daily basis to keep their price low, but it has now cut off those purchases to produce a slight cushioning effect as prices collapse. The Central Bank also has the ability to decrease the supply of rubles by increasing its key interest rate for the first time after a long period of decreases. For its part, the Finance Ministry has announced that it will begin selling dollars from Russia’s National Wealth Fund.

At least on the surface, the current situation looks similar to previous oil-driven declines in Russian markets during 2014 and 2016. In both cases, drops in ruble and stock values led to economic crises that brought about decreased production and income throughout Russia. This time may be different, however: Russia is better prepared for an oil shock than it has ever been before. Its national reserves are extremely high, much of its government’s income is in dollars (making ruble devaluation advantageous), and many of its budgetary expenditures are in rubles. Meanwhile, Russia’s inflation levels are at historic lows (about two percent per year), meaning that the Central Bank may even welcome a rise to 3.5 or four percent.

The potential advantages of ruble devaluation for Russia in 2020 also extend to international economic relations. Russia’s dependency on imports (which grow in cost when the ruble declines) is much lower than it was in 2014, which will protect Russian consumers from sharp price increases. Russian producers will also benefit as it becomes easier for them to compete with international rivals.

All that said, declining oil prices will obviously bring about losses for Russia as well. Its citizens’ real incomes could drop, and its government will likely be forced to postpone the large outlays it has been planning for the massive national projects requested by President Vladimir Putin.

Why did Russia allow oil prices to drop? Would the fall even have been avoidable?

The primary cause of the current collapse in oil prices is the novel coronavirus outbreak. The budding epidemic decreased demand for fuel, especially in China (one of the world’s main oil consumers) and among airlines.

Oil-producing countries could have resisted that decline in demand by decreasing supply — that is, by cutting down extraction rates. Stopping some oil production is a tried-and-true collapse prevention method: A conglomerate consisting of the OPEC countries and other major oil producers like the U.S. and Russia has made the decision to cut supply multiple times in recent years. Last week, during consultations for that conglomerate (known as OPEC+), Saudi Arabia proposed a massive decrease in oil extraction to 1.5 million barrels per day, but the plan was conditioned on Russia’s agreement. That decrease was also meant to be extended following a treaty expiration on April 1; after that date, global extraction rates could have decreased to just over 500,000 barrels per day. Moscow responded to the Saudi plan by proposing a much smaller production decrease, and on March 9, negotiations officially fell apart. Saudi Arabia subsequently announced that it would ramp up extraction rather than decreasing it and that it would offer buyers a discount on crude oil through the month of March.

That price war stems from the current distribution of oil markets: Major figures in the Russian oil industry, especially Rosneft head Igor Sechin, believe that OPEC and the United States are aiming to profit from current global circumstances at Russia’s expense. However, Russia’s starting position in the fight is stronger than that of its opponents. While the Saudi budget can only be balanced at oil prices of around $80 per barrel, Russia’s requires just half that price.

Moscow likely decided that a price drop amid the COVID-19 epidemic was inevitable in any case, leading its government and oil industry to switch into a “controlled crisis” mode as soon as possible. From here, the country can only wait for the coronavirus to retreat or for Saudi Arabia to return to the negotiating table.

In the meantime, economists expect nosediving oil prices to cost Russia about 0.5 percentage points of economic growth. The International Energy Agency predicts that oil demand will rebound to a normal level in the second half of this year.

If the epidemic spins out of control around the world, however, Russia’s economy will take a bigger hit than almost any other. According to calculations from Bloomberg, the outbreak may cause a 4.8 percentage point decrease in annual GDP growth, sending the country’s economy into a deep recession.

Analysis by Dmitry Kuznets

Translation by Hilah Kohen