Russia is getting ready for a protracted slump in global oil prices and could use its $150 billion wealth fund to support the ruble as a breakdown in talks with OPEC kicked off a price war and pushed the currency to its weakest level in four years, Bloomberg reported.
Under the government’s budget rule, which was designed to reduce the ruble’s vulnerability to swings in oil prices, the Bank of Russia said it will halt purchases of foreign currency. The Finance Ministry said it may start to sell foreign currency if the oil price stays below $42.40 per barrel, the cut-off level at which the budget balances.
Russia’s oil-wealth reserves, the National Wealth Fund, rose to $150 billion as of March 1, which “is sufficient to cover lost revenue if oil prices drop to $25 to $30 a barrel for six to ten years,” the ministry said in its statement.
Brent crude tumbled by almost a third to $31 a barrel on Monday, as Goldman Sachs Group Inc. told clients it could quickly dip into the $20s. In offshore trading, the ruble plunged to a four-year low of 74.7815 against the dollar. Domestic trading is closed Monday for a federal holiday. Under Russia’s budget rule, all extra oil and gas revenue above the $42.40 cut-off goes into the ministry’s National Wealth Fund, with the central bank buying foreign currency from the market. If the oil price falls below that level, the lost revenue will be compensated by the wellbeing fund and the corresponding amount of foreign currency will be sold on the market, the Finance Ministry said. The ministry also indicated it may skip its weekly auctions of domestic bonds depending on market conditions.
The central bank said it is monitoring the financial markets and is ready to use additional measures to maintain ruble stability. A decision to resume foreign currency purchases “will be made based on the actual market conditions in March,” it said.
“A weaker ruble will help to offset some of the negative impact of lower oil prices, but it may also have negative inflationary consequences and may undermine sentiment amongst Russian households,” Piotr Matys, a strategist at Rabobank in London, told Bloomberg by email. “The measures announced by the Russian central bank and the finance ministry will not prove, however, sufficient to stabilize the ruble as long as oil continues to fall and concerns about the coronavirus are rising.”