Russia's quirky fighting course is now an advantage

Russia has been increasingly isolated from the rest of the world since 2014, under pressure from international sanctions. This idiosyncratic course is a major advantage during the corona outbreak and the ensuing oil crisis.

The direct consequences of the corona virus can also be felt in Russia, just like in the rest of the world. According to official figures, the country has approximately 25.000 infections. All air traffic has been suspended at the end of March and all people over 65 are advised to go into self-isolation. However, it is mainly the indirect consequences that affect Russia much more severely than many other countries.

The country exported $200 billion worth of oil and other energy products last year. That amount will be considerably lower in 2020, as the oil price has halved since the turn of the year. An important reason is the corona outbreak. A large part of the transport sector has come to a standstill, which means that the demand for oil is falling sharply.

Lower oil price, higher interest?
It is not the first time that Russia has faced a collapsing oil price. In the second half of 2014, the price for a barrel of Brent oil fell from nearly $110 to over $50. On the foreign exchange market there was suddenly a lot less demand for rubles: the currency for Russian oil. In just over 6 months, the coin's value dropped nearly 3 cents to less than 1,5 cents.

In the end, the central bank had to raise the Russian interest rate from 7,5% to 17% to prevent the ruble from becoming completely worthless. Interest rate hikes are a tried and tested way to give a currency a boost. Because let's face it: aren't you also considering switching to another bank if the savings interest there is a few percent higher?

Production limitation doesn't help
Since the turn of the year, the price of a barrel of Brent oil has again halved. That decline continued this week, despite Russia making agreements with OPEC countries to cut production by nearly 10 million barrels per day in May and June. It is doubtful whether the oil countries can agree on an even larger production cut. However, the Russian central bank is not ready to raise interest rates again.

An interest rate hike could be the final blow to the economy already severely damaged by corona. There is therefore a good chance that President Elvira Nabiullina will announce a new interest rate cut at the central bank meeting on April 24. However, it is not certain that the ruble will receive another blow. Russia has been forced to learn many lessons from the previous crisis.

Russia has learned its lesson
The previous oil crisis coincided with the introduction of all kinds of international sanctions against Russia, including for the annexation of Crimea. Since then, Russia wants to be as dependent as possible on the outside world. Only 10% of food is imported. In 2014 that was 25%. Companies have repaid international debt at lightning speed. The government has also built up a reserve pot of more than $100 billion.

Thanks to its isolated nature, the international trade shock from corona will hit much less hard than an open economy like that of the Netherlands. This does not alter the fact that the virus is also a disaster for Russia. One difference is that the Russians are much more used to disasters than the western world. And the lessons they've learned are now making the ruble drop less quickly than you think.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.