41 the link between Oil and Rouble stability
The Rouble weakened against the Euro -Dollar basket during Monday trade as crude prices after OPEC's decision to maintain output. But a rebound in U.S. trade to a 2 month high has an upside for the Russian currency.
OPEC's vote against deeper supply cuts sent oil lower on Nymex – but Pavel Sorokin, Analyst at Unicredit Securities, says it’s a knee jerk and doesn’t expect the price to slump.
“There may be some minor fluctuations in the price because the market was trying to play this factor last week. But I doubt it's going to last long so we are hovering in this margin from $41 to $46/bbl and I believe we are going to stay in the range for some time.”
It didn’t take long for the Russian rouble to react to oil's move. In its two currency basket the Rouble slipped against the Euro but was steady against the dollar. Its basket value reached 39. 5 roubles – a step closer to the Central Bank's corridor limit of 41 roubles.
Coincidentally, 41 is also the magic number for oil. Evgeny Nadorshin Chief Economist at Trust Bank says an oil price above $41/bbl guarantees Rouble stability.
“With the current level of the oil price the CB will be able to keep the current exchange rate until the end of 2009 without any problem. Even if capital returns to the economy, this will not be the case of 2008 and market participants won’t manage to create such pressure on the Central Bank that the Central Bank will have to retreat. The revised version of the budget that the government will publish this week is based on $41/bbl. But even that assumes a deficit equal to 8% of GDP.”
If the magic number fails to hold – the government is more likely to use reserves – of past oil earnings – to plug the deficit rather than support the currency. But Monday trade in New York sees crude pushing beyond $45/bbl, adding further to the comfort zone for the Rouble and the revised budget alike.