Russia wants to free ruble from oil link

MOSCOW: Russia wants the ruble to stop acting like an oil currency.

A fiscal mechanism unveiled this year, under which the government absorbs all additional revenue when crude is above US$40 a barrel, marks a “change in ideology” from the previous mechanism designed to ensure budget stability, according to Deputy Finance Minister Vladimir Kolychev.

Given that the central bank is allowing the market to determine the exchange rate, the new approach set the task of freeing the ruble from oil as the “main goal,” he said in an interview in Moscow.

“It’s an important change in policy,” said Kolychev, who joined the Finance Ministry two years ago from VTB Capital. “It’s especially important under a free float, when there’s no artificial restraint on the ruble.”

The revamp has been among the most far-reaching efforts by Russia to pry the economy out of its reliance on energy and insulate it from the ups and downs in crude after its crash gutted the finances of the government and households alike.

And while Russia and Opec have teamed up to stabilise oil, Kolychev said risks remained that it could again fall below US$40, with an equilibrium price seen between US$40 and US$50 over the next five to seven years.

“The deal between producers over temporary output curbs will help eliminate excess stockpiles,” he said.

“But it’s hard to say if the market will rebalance from the point of view of demand and supply at the moment the accord expires.”

As the downturn in commodities rippled through the economies of oil-producing nations, their responses have differed.

Saudi Arabia, the dominant Opec power, is pushing ahead with its blueprint for a post-oil era, which includes subsidy cuts and new taxes as well as a plan to expand its sovereign wealth fund into the world’s largest.

Russia, the world’s biggest energy exporter, has kept its fiscal and monetary policy tight, focusing its efforts on trying to unlock domestic investment by reining in inflation and encouraging savings.

Elevated interest rates have also made Russian assets an investor favourite. During the four months that the Finance Ministry conducted its foreign-exchange purchases, which netted 262 billion rubles (US$4.6bil), the ruble has kept up its rally, gaining more than 3% in the period.

The central bank has attributed its strengthening in the first quarter to sales of foreign revenue by exporters and large tax payments, not its carry-trade appeal.

Should the economy be experiencing any “serious changes,” ruble fluctuations are possible, with the “substantial inflow of capital” since the start of the year pushing the currency from its “equilibrium value,” according to Kolychev.

“We have to comply with the budget rule if we don’t want the ruble’s exchange rate, interest rates and the structure of prices to jump back and forth,” he said.

“Now we are no longer just collecting revenue but also defending domestic conditions from volatility in oil.” — Bloomberg