Rus­sia will rely on Opec as a bench­mark as it sizes up im­pact of oil out­put cuts

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Opec has Rus­sia over a bar­rel when it comes to where its mone­tary policy goes next. So much is rid­ing on the out­come of ne­go­ti­a­tions be­tween Opec and its part­ners over their out­put cuts that the Bank of Rus­sia iden­ti­fied it for the first time as “the key source of in­fla­tion risks in the near fu­ture”. Af­ter de­liv­er­ing an un­ex­pected rate cut of half a per­cent­age point on Fri­day,

the fu­ture path of mone­tary policy will de­tour to Vi­enna, where Rus­sia and Opec min­is­ters will meet on May 25 to make a fi­nal de­ci­sion.

“It may re­sult in a tem­po­rary hike in volatil­ity of cap­i­tal flows and the ex­change rate, un­der­min­ing ex­change rate and in­fla­tion ex­pec­ta­tions,” the bank said. “That said, in­fla­tion risks will be lower in the sce­nario with ris­ing oil prices.”

Pol­i­cy­mak­ers are throw­ing a new degree of un­cer­tainty into their out­look af­ter sur­pris­ing all but six of 42 econ­o­mists in a Bloomberg sur­vey with their big­gest rate cut since Septem­ber.

The world’s largest en­ergy ex­porter is one of 11 non-Opec na­tions that reached an agree­ment with the pro­duc­ers’ group last year to cut out­put by as much as 1.8 mil­lion bar­rels per day in an ef­fort to elim­i­nate a global sur­plus. The Bank of Rus­sia next re­views bor­row­ing costs on June 16.

“A 50 ba­sis-point cut is a trade-off mar­ket mea­sure, buy­ing the cen­tral bank more time to see if the oil price goes lower or higher,” said Alexey Po­gorelov, an econ­o­mist at Credit Suisse Group. “Oil is very im­por­tant. That’s why they added this com­ment on the oil price as a key threat.”

In March, the cen­tral bank’s up­dated fore­casts showed Rus­sia’s Urals ex­port blend at an av­er­age of $50 per bar­rel this year, but fall­ing to $40 at end-2017 and then stay­ing near that level in 2018-19. Un­der a more op­ti­mistic sce­nario, it said Urals may av­er­age $55 in 2017 and $60 in 2018.

“The next de­ci­sion will largely de­pend on the prospects for oil,” said VTB Cap­i­tal econ­o­mist Alex Isakov. “That is, the Bank of Rus­sia is link­ing its de­ci­sion to oil prices and doesn’t rule out eas­ing.” Ex­pand­ing US crude pro­duc­tion is threat­en­ing to di­lute the im­pact of Opec-led sup­ply cuts. While Rus­sia says it is on the verge of fully im­ple­ment­ing its pledged 300,000 bar­rels-per-day out­put re­duc­tion, an­a­lysts are still de­bat­ing whether the Krem­lin would be will­ing to join Opec in ex­tend­ing the agree­ment for an­other six months.

The Bank of Rus­sia said its “as­sess­ment of the over­all potential” for eas­ing this year is un­changed. At the pre­vi­ous meet­ing in March, pol­i­cy­mak­ers cut the bench­mark by a quar­ter- per­cent­age point af­ter a six-month pause.

Gains in the rou­ble have re­duced the value of Rus­sian en­ergy ex­ports, which are de­nom­i­nated in dol­lars. While crude is 17 per cent higher since Novem­ber, a bar­rel of oil in April is giv­ing only about 7 per cent more taxes in rou­bles than five months ago, Gold­man Sachs Group es­ti­mates. The price of Brent in rou­bles this week hit the low­est since last Au­gust. “By flag­ging the Opec ne­go­ti­a­tions as clearly as the Rus­sian cen­tral bank now did, the bank pre­emp­tively jus­ti­fies any rather sud­den change to its cur­rent path,” said Wolf-Fabian Hunger­land, an econ­o­mist at Beren­berg Bank in Ham­burg, Ger­many. “The bank says that the course of its mone­tary policy is sub­ject to po­lit­i­cal risk, largely an ex­ter­nal one.”

An­drey Ru­dakov/Bloomberg

Rus­sia says it is close to fully ap­ply­ing out­put cuts.

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