Russian macro: Oil near breakeven price - FX interventions to subside, ruble moving toward equilibrium

RUSSIA ECONOMICS - Report 09 Jun 2020 by Evgeny Gavrilenkov and Alexander Kudrin

As oil prices continued to climb in recent weeks, and the Urals blend price exceeded $40/bbl on June 8, the Russian ruble appreciated to below 70 per USD. In early June, the Ministry of Finance announced its daily FX interventions plan, which can only strengthen the ruble in the current environment. The fiscal rule was designed not only to limit the government spending by linking it to a “theoretical” or “planned” breakeven oil price and make it thriftier, it was also designed to limit the scope of ruble depreciation when the oil price falls below this level, and respectively, to limit an appreciation of the currency if the oil price is high.

Overall, it appears that the fiscal rule was also designed to reduce the oil-and-gas tax collection (probably unintentionally) if the oil price is low, as the fiscal rule prevents the ruble from depreciation to a kind of temporary equilibrium. In an environment of a low price of oil and smaller trade and current account surpluses, the relative influence of the government interventions becomes stronger, and the exchange rate moves away from the equilibrium area.

Part of the fiscal rule that is associated with FX interventions is supposed to be either inactive or very limited if oil holds close to a breakeven threshold. This means that there may be more chances for the ruble to find its equilibrium if the oil price fluctuates there for a prolonged period.

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