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Russia: The Ruble Runs Ahead of Oil

April 10, 2015


While Putin's recession deepens in Russia, firming oil prices have given the ruble a lift. Maybe too much of a lift. The correlation coefficient between oil and the ruble since the start of 2014 shows a near-perfect inverse relationship of -0.97. Based on a simple regression, Brent's current price of $57.75 suggests that the ruble should be trading at around 63.5 to the dollar, fully 20% weaker than where it is now at 52.8, presenting a potential tactical trade, depending on how much oil prices advance from here.

RUSSIA'S RUBLE RUNS AHEAD OF OIL PRICES

 Source: Bloomberg, McAlinden Research

MRP closed its formal recommendation to short the ruble in December, just as the ruble began to bottom. Since we avoid making short-term recommendations as a rule, we'll remain on the sidelines for now. But we don't share the Economy Minister's view that the ruble's current level is “fundamentally justified.”

If anything, Russia's economic fundamentals are getting worse. As today's Daily Intelligence Briefing shows, industrial production is down 2% from a year ago, retail sales are down 8%, and  car sales have plunged. Consensus expectations, as tracked by Bloomberg, have the economy contracting into 2016. Politically, there are whiffs of discontent, with local protests cropping up more often, although so far they remain small-scale and have yet to make a dent into Putin's buoyant approval ratings. Meanwhile, Russia's deeply rooted structural problems continue to get worse as capital investments to fix decaying Soviet-era infrastructure recede farther onto the horizon. Unless things change, Putin's recession could well last longer than Putin.

Last updated April 10, 2015
 
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Warren Hatch, PhD, CFA
Portfolio Management and Global Investment Strategy
McAlinden Research Partners

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