Rouble equilibrium value and oil prices
If oil prices continue to rise what does this mean for the value of the rouble?
Okay, I know that I’ve been pumping out posts on the Russian economy at a rate that is probably a bit higher than it should be. But the impact that the war is having on markets is so unusual that it seems worth looking at closely. There are obviously investment implications, but even just from an academic point-of-view this has been very interesting.
So, today I’m going to do one more on the rouble. I have already highlighted that the disconnect between the oil price and the rouble provoked by the crisis is highly unusual. Since the rouble does not yet appear to have found a bottom and oil has not yet found a top, this is worth exploring in more detail.
The following chart lays out two things. In orange, is the equilibrium Russian real effective exchange rate (REER) at Brent oil prices of $130, $160, $180 and $220. In red, is my latest estimated REER (based on USD/RUB) and today’s Brent oil price.
There’s a lot here. First off, today’s rouble value. The rouble continues to get stranger and stranger. Today’s rouble price is in line with a sub-$50 per barrel oil price. Yet today’s Brent price is around $119 at the time of writing. This is even more extreme than when I wrote the original post ten days ago.
Even more striking is where the equilibrium REER will be if energy prices continue to go up. $220 is a very high forecast. I previous used it as the level we might expect if the EU actually stopped importing energy from Russia (although I suspect the actual oil price would be much higher than $220 in this scenario). But even the more moderate $160-$180 price range looks very bullish for the (equilibrium) rouble.
Yes, perhaps a new day is dawning. Perhaps the rouble is going to continue to be driven by oil prices, but within a new equilibrium range. Still, even if we shifted that line all the way to the right to touch today’s prices, we would still be expecting a significant bounce back if energy prices continue to climb.
Maybe reconsider your thoughts on the effectiveness of sanctions? Consider their effectiveness against Iran. Sanctions were phased in over +/- 9 years until trade in USDIRR was frozen. Over that time the rial fell 80% against the dollar and Iranian GDP fell by more than 2/3rds. The Rial exchange rate became entirely event-driven. For Russia, it's much worse since they're depleting their capital stock on a war at a run rate of +/- 25% of GDP, annualized.