$40 oil could be a game-changer for Russia

If oil prices tumble below $US40, then the Russian Central Bank could be inspired to interrupt its rate-cutting agenda.

“If the situation on the foreign-exchange market changes as a result of a significant drop in oil prices — to $US40 a barrel, with fluctuations between $US40 and $US45 — then the central bank will probably halt the process of cutting the rate,” Kremlin economic aide Andrey Belousov told Bloomberg in an interview
.

Notably, Belousov’s statement does not come as a complete surprise.

Although the bank slashed rates for the fifth time this year in early August, the cut was less than expected amid a weaker ruble (and lower oil prices). Additionally, the bank took out the phrase “ready to continue cutting,” signalling a potential shift in the central bank’s strategy.

Already back then, analysts suggested that the bank would now closely monitor the ruble’s moves.

“Policy makers are no longer committing themselves to lowering interest rates further,” Liza Ermolenko, an analyst at Capital Economics, told Bloomberg several weeks ago. “
Future interest rate decisions are likely to be determined by moves in the currency.”

Still, that doesn’t mean that arresting the rate-cutting programme would be an easy choice for the bank, as it is keen to keep cutting rates due to Russia’s anemic economy.

“On the one hand, the recession in the economy and extremely tight credit conditions argue for a rate cut,” Ermolenko told Bloomberg. “But on the other hand, easing policy at the time when the ruble is weakening sharply could cause it to fall even further, creating risks for inflation and financial stability.”

The ruble tumbled to a 6-month low against the dollar on Monday. The currency is currently trading around 65.7 per dollar, and got down as low as 65.9 earlier in the day. To date, it has tumbled approximately 25% since its peak in mid-May.

The ruble’s drop followed the recent oil price drop. Brent crude, which is used to price Russia’s main export blend, is currently trading around $US48.59, slightly above its 2015 low of $US45.19.

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