Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why Russia Will Halt the Ruble’s Slide and Keep Pumping Oil

Commodities / Crude Oil Dec 19, 2014 - 09:16 AM GMT

By: Marin_Katusa

Commodities

The harsh reality is that U.S. shale fields have much more to fear from plummeting oil prices than the Russians, since their costs of production are much higher, says Marin Katusa, author of The Colder War: How the Global Energy Trade Slipped from America’s Grasp.

Russia’s ruble may have strengthened sharply Wednesday, but it’s plunge in recent days has encouraged plenty of talk about the country’s catastrophe, with some even proclaiming that the new Russia is about to go the way of the old USSR.


Don’t believe it. Russia is not the United States, and the effects of a rapidly declining currency over there are much less dramatic than they would be in the U.S.

One important thing to remember is that the fall of the ruble has accompanied a precipitous decline in the per barrel price of oil. But the two are not as intimately connected as might be supposed. Yes, Russia has a resource-based economy that is hurt by oil weakness. However, oil is traded nearly everywhere in U.S. dollars, which are presently enjoying considerable strength.

This means that Russian oil producers can sell their product in these strong dollars but pay their expenses in devalued rubles. Thus, they can make capital improvements, invest in new capacity, or do further explorations for less than it would have cost before the ruble’s value was halved against the dollar. The sector remains healthy, and able to continue contributing the lion’s share of governmental tax revenues.

Nor is ruble volatility going to affect the ability of most Russian companies to service their debt. Most of the dollar-denominated corporate debt that has to be rolled over in the coming months was borrowed by state companies, which have a steady stream of foreign currency revenues from oil and gas exports.

Russian consumers will be hurt, of course, due to the higher costs of imported goods, as well as the squeeze inflation puts on their incomes. But, by the same token, exports become much more attractive to foreign buyers. A cheaper ruble boosts the profit outlook for all Russian companies involved in international trade. Additionally, when the present currency weakness is added to the ban on food imports from the European Union, the two could eventually lead to an import-substitution boom in Russia.

In any event, don’t expect any deprivations to inspire riots in the streets of Moscow. Russian President Vladimir Putin’s popularity has soared since the beginning of the Ukraine crisis. The people trust him. They’ll tighten their belts and there will be no widespread revolt against his policies.

Further, the high price of oil during the commodity supercycle, coupled with a high real exchange rate, led to a serious decline in the Russia’s manufacturing and agricultural sectors over the past 15 years. This correlation—termed by economists “Dutch disease”—lowered the Russian manufacturing sector’s share of its economy to 8% from 21% in 2000.

The longer the ruble remains weak, however, the less Dutch disease will rule the day. A lower currency means investment in Russian manufacturing and agriculture will make good economic sense again. Both should be given a real fillip.

Low oil prices are also good for Russia’s big customers, especially China, with which Putin has been forging ever-stronger ties. If, as expected, Russia and China agree to transactions in rubles and/or yuan, that will push them even closer together and further undermine the dollar’s worldwide hegemony. Putin always thinks decades ahead, and any short-term loss of energy revenues will be far offset by the long-term gains of his economic alliances.

In the most recent development, the Russian central bank has reacted by raising interest rates to 17%. On the one hand, this is meant to curb inflation. On the other, it’s an direct response to the short selling speculators who’ve been attacking the ruble. They now have to pay additional premiums, so the risk/reward ratio has gone up. Speculators are going to be much warier going forward.

The rise in interest rates mirrors how former U.S. Fed Chair Paul Volcker fought inflation in the U.S. in the early ‘80s. It worked for Volcker, as the U.S. stock market embarked on a historic bull run. The Russians — whose market has been beaten down during the oil/currency crisis — are expecting a similar result.

Not that the Russian market is anywhere near as important to that country’s economy as the US’s is to its. Russians don’t play the market like Americans do. There is no Jim Kramerovsky’s Mad Money in Russia.

Russia is not some Zimbabwe-to-be. It’s sitting on a surplus of foreign assets and very healthy foreign exchange reserves of around $375 billion. Moreover, it has a strong debt-to-GDP ratio of just 13% and a large (and steadily growing) stockpile of gold. Why Russia will arrest the ruble’s slide and keep pumping oil

And there is Russia’s energy relationship with the EU, particularly Germany. Putin showed his clout when he axed the South Stream pipeline and announced that he would run a pipeline through Turkey instead. The cancellation barely lasted long enough to speak it before the EU caved and offered Putin what he needed to get South Stream back on line. Germany is never going to let Turkey be a gatekeeper of European energy security. With winter arriving, the EU’s dependence on Russian oil and gas will take center stage, and the union will become a stabilizing influence on Russia once again.

In short, while the current situation is not working in Russia’s favor, the country is far from down for the count. It will arrest the ruble’s slide and keep pumping oil. Its economy will contract but not crumble. The harsh reality is that American shale fields have much more to fear from plummeting oil prices than the Russians (or the Saudis), since their costs of production are much higher. Many US shale wells will become uneconomic if oil falls much further. And it they start shutting down, it’ll be disastrous for the American economy, since the growth of the shale industry has underpinned 100% of US economic growth for the past several years.

Those waving their arms about the ruble might do better to look at countries facing real currency crises, like oil-dependent Venezuela and Nigeria, as well as Ukraine. That’s where the serious trouble is going to come.

The collapse in oil prices is just the opening salvo in a decades-long conflict to control the world’s energy trade. To find out what the future holds, specifically how Vladimir Putin has positioned Russia to come roaring back by leveraging its immense natural resource wealth, click here to get your copy of Marin Katusa’s smash hit New York Times bestseller, The Colder War. Inside, you’ll discover how underestimating Putin will have dire consequences. And you’ll also discover how dangerous the deepening alliance between China, Russia and the emerging markets is to the future of American prosperity. Click here to get your copy.

The article Why Russia Will Halt the Ruble’s Slide and Keep Pumping Oil was originally published at caseyresearch.com.
Casey Research Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules