The Russian ruble moved sharply this week as the global equity and commodities rout continues in the wake of the Federal Reserve raising interest rates.
Russia’s central bank over-reacted to a rise in inflation as the global economy moves towards a chaotic and politically dangerous 2019.
Oil prices are moving in sync with equities as the markets have entered a panic phase anticipating a global recession next year. Normally the Ruble is very strongly tied to oil prices. But as I showed in an article just before Thanksgiving, the ruble didn’t respond at all to a drop in Brent Crude from $80+ per barrel to around $60.
Amidst a 38% drop in the price of Brent Crude since October, the ruble has fluctuated in a 4% band around 67 to the dollar. This is shocking stability given the volatility in oil prices.
Ruble weakness from earlier this year was an over-reaction to heightened sanctions by the U.S. especially at a time where the threat of further sanctions on Iran and Venezuela’s collapse kept prices high.
Oil’s Outlook
And now it is catching up to this drop in oil prices with this week’s weakness. Oil prices are unsustainable above $65 per barrel amidst this level of supply.
They are equally unsustainable below $40 per barrel for just about everyone due to budget constraints (the Saudis) or debt-servicing (U.S. Frackers).
Since free-floating the ruble back in late 2014, Russia has been less and less affected by the fluctuations in oil prices. Because domestic costs are paid in rubles and income earned in dollars is offset by the weaker ruble.
It is government expenditures which suffer during waves of lower oil prices. But this year’s high prices have swelled Russia’s state coffers, running a 2.1% of GDP budget surplus this year.
Russia has an auto-budgeting system based on oil tariff revenues the budget will adjust based on anticipated oil prices.
And given the announced 1.2 million barrel per day cut from OPEC don’t expect the Russians to budget near $80 per barrel for 2019. That was a bearish signal, a sign of weakness.
Energy makes up the bulk of the country’s exports but that proportion is falling steadily as other industries mature. In 2017 oil/gas made up just under 60% of exports down from 69% in 2014.
They’ll likely be up as a percentage this year because of higher prices, but non-resource exports hit a record $147 billion this year, according to a recent statement from Andrey Slepnev, Chief Executive of the Russian Export Center.
That’s the important part.
The double whammy of increased sanctions (with threats of even more) and lower prices should have sent the ruble skyrocketing similar to what we saw this year with the Turkish lira.
I’m sure that’s been the hope on Capitol Hill.
But we haven’t and that speaks to the growing proportion of Russian trade settling outside the dollar.Russian exports continue to grow thanks to the weaker ruble and Putin’s continued growing stature as a statesman.
This is having the positive effect of opening up more markets for Russian goods and working with countries willing to skirt U.S. sanctions.
The Real Ideological War
Trump and Putin are locked in an ideological war of how to conduct trade now. And the shoe, nominally, is on the other foot. I have to marvel at Trump turning mafioso, punishing people for doing business with anyone but him while Putin pulls a Dale Carnegie looking for wins where he can get them.
Trump has his stick. Putin offers carrots.
It’s a sad commentary on what’s become of the U.S. that Trump believes he can bully his way to remaking America in his image. He talks a lot about America being respected again. But that’s not the sense I get when I look around the geopolitical game board.
In fact, it is the opposite. Trump may get obedience and he can choose to see deference to the U.S.’s power as ‘respect’ but it’s not. It’s resentment. And he should be smart enough to know this.
He’s undermining the one thing that makes the dollar the dollar. Stability and consistency.
Putin, on the other hand, chooses to ignore Trump where he can and make offers which tie Russia and its neighbors together in a web of trade. The hysterical neoconservatives here shout incoherently about “undo Russian influence.”
This is simply code for, “We want Russia poor, weak and incapable of defending herself so we can take it over.”
But the reality is that with each pipeline built between Russia and Europe, India and/or China the likelihood of war between them recedes. Viewed through that lens, Russia uses its energy resources to defend its future.
The West calls it ‘Pipeline Diplomacy,’ and our opposition to it stems from outdated ‘Great Powers’ theory of how to play the great game of geopolitics.
Because Russia knows all too well the belligerence of U.S. and European elites towards it. It’s been dealing with it for centuries. And Putin, as a student of history, knows that time is Russia’s greatest ally.
Stability Becomes Reserves
When looking at the geopolitical picture you have to look at the overall trend, the players at the table and where their motivations lie. For Russia the goal is an independent path which does not leave it at the mercy of U.S. political imperatives.
No one gets out of a conflict with the U.S. over trade unscathed, but that’s not the goal. The goal is minimizing the damage and building stronger local relationships which fell into disrepair after the fall of the U.S.S.R.
Prime Minister Dmitri Medvedev finally made it clear that Russian political leaders have turned a corner on their thinking.
He added that US sanctions have pushed Moscow and Beijing to think about the use of their domestic currencies in settlements, something that “we should have done ten years ago.”
“Trading for rubles is our absolute priority, which, by the way, should eventually turn the ruble from a convertible currency into a reserve currency,” the Russian prime minister said.
That’s what Putin’s endless meetings are all about, building trade across central Asia with the ruble as a viable alternative for the dollar.
The trend is clear. The West is broke. The endless hunt for taxes to shore up federal budgets will continue. The U.S. is interested solely in maintaining its power. This is really what Trump means when he says, “Make America Great Again.”
And he will do anything to achieve that goal, regardless of the secondary effects. This makes U.S. policy aggressive, violent and vindictive. And that is not the recipe for long-term economic or political stability.
This is what Trump and his national security team most fear, a Russia capable of building a parallel institutional system operating outside their control.
Because people respond to incentives. And each day that Trump makes using the dollar more expensive is another day where someone else makes the decision not to use them.
So, a stable ruble, unfazed by sanctions and wild swings in the price of oil, makes that decision that much easier. Each day that brings another small deal settled in rubles or another load of oil paid for in yuan and swapped for gold is another day closer to that reality.
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