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MARCH 2021

Russia Appears Unprepared For Market Chaos (Again)


Russia Appears Unprepared For Market Chaos (Again)

Click to see full-size image

On March 9th, 1 US dollar reached a price of 75 rubles, and the oil prices reached a nearly 30-year-low, with Russia showing that it is, yet again, woefully unprepared for a crisis, similar to those in 2008, and in 2014 when the ruble fell rapidly.

Below is a timeline of what exactly happened:

On March 9th, the price of North Sea Brent oil fell by more than 27%, dropping below $32 per barrel, the price of WTI fell below $ 30 per barrel. During the bidding price for Brent fell by a maximum of 31%, to $31.27 per barrel.

The cost of Brent crude oil began to decline as early as March 6th, amid reports of OPEC + countries’ inability to agree on a new reduction in production.

Against the background of collapse in oil prices, the rates of American and European currencies soared on the international currency market. At the moment, the dollar exchange rate on Forex reached 75 rubles., Euro – 85, but in the afternoon of March 9th, the Russian currency recovered a bit. Currency trading on the Moscow Exchange on March 9th is not held because of the weekend.

Russia Appears Unprepared For Market Chaos (Again)

Change of the ruble against the dollar on March 9th, 2020. Click to see full-size image

Russia Appears Unprepared For Market Chaos (Again)

Change in the ruble against the dollar in the 30 days before March 9th, and from March 4th to March 9th, specifically. Click to see full-size image

The Bank of Russia has announced that it will not buy currency in the market under the budget rule for at least 30 days.

Falling oil prices and the strengthening of the dollar and the euro have affected Asian indices. The Hong Kong Stock Exchange Index Hang Seng fell 1064 points (4.07%) to a value of 25071, according to data at 04:54 Moscow time.

The Nikkei 225 index of the Tokyo Stock Exchange also declined at the opening of trading. It fell by 1196 (5.77%) points to the level of 19553 points as of 05:10 Moscow time.

According to data at 05:17 Moscow time, on the Shanghai Stock Exchange, the SSEC index fell 2.11% to 2970.75 points.

European exchanges on March 9th opened at a low. The London FTSE 100 index at the opening dipped 8.54%, German DAX – 8.09%, French CAC 40 – 6.31%.

Russian stocks collapsed sharply at the opening of trading in London.

  • Shares of Gazprom fell 24.82% to $ 4.12 as of 11:22 Moscow time;
  • Rosneft – 23.54% to $ 4.41;
  • Novatek – 33.6% to $ 92.5;
  • Gazprom Neft – by 11.62% to $ 24.35.
  • Norilsk Nickel shares lost 10.57% and amounted to $28.96;
  • NLMK fell 13.6% to $ 15.09;
  • Severstal – 18.9% to $ 9.63.

The price of shares of the Saudi oil company Saudi Aramco against the backdrop of the breakdown of the OPEC + agreement following the results of trading on March 8th fell by 9.09%, to 30 riyals (about $8), dropping for the first time below the IPO. Amid the outbreak of a new coronavirus threatening the global economy, a meeting of OPEC oil ministers and countries outside the organization, including Russia, Kazakhstan and Azerbaijan (OPEC +), was held in Vienna on March 6th.

For the first time since 2016, the participants in the meeting could not agree on the terms of the deal to reduce oil production, and it will cease to be effective from April 1st. At the last meeting, Russia and Saudi Arabia took opposite positions.

Moscow refused an additional reduction in production and proposed to extend the deal under current conditions (a decrease in oil production by 1.7 million barrels per day) for the second quarter of 2020, and Riyadh advocated a reduction of another 1.5 million barrels per day, until the end of 2020.

Rosneft, in turn, said that for Russia, the deal with OPEC + was “meaningless”: yielding its own markets, the country only “cleared the way” for American shale oil.

Amid a breakdown in the agreement with OPEC, Saudi Arabia announced its readiness to increase production to more than 10 million barrels per day, and, if necessary, to a record 12 million. In addition, Saudi Aramco also decided to lower crude oil prices.

Analysts at US investment bank Goldman Sachs admitted that the price of Brent crude could fall to $20 per barrel. In addition, they lowered their forecasts for the second and third quarters, suggesting that the cost of a barrel of Brent will not exceed $30.

According to Russian Minister of Energy Alexander Novak, now the increase in oil production in the country depends on the plans of domestic companies. Exiting the deal may allow Russia to increase production by 0.3 million barrels per day, he noted.

Furthermore, according to the forecast of LUKOIL co-owner Leonid Fedun, due to the collapse of the deal, Russia will lose between $100 million to $150 million daily.

According to him, although Russian companies have expressed their desire to increase production, a growth of 2-3% will not be able to compensate for future losses. Currently, there is a rare combination of a massive negative oil demand shock, positive supply shock and no swing producer, that causes the crude oil price implosion, the founder of the consulting company Rapidan Energy Bob McNally, said on Twitter.

The last time such a “terrible combination” was in the early 1930s, against the backdrop of the Great Depression, and then the price of oil fell to “cents per barrel,” he said.

The most optimistic scenario, considered by experts, suggests that China will quickly take control of the situation with the coronavirus, and the disease will not continue to spread and will not have a serious impact on most countries in Europe and North America. In this case, the authorities will not need to take harsh measures to contain the epidemic; in addition, the disease will practically not affect transport, experts said. In this case, world oil demand, according to their forecast, will increase by 480 thousand barrels per day. Whether this will actually happen remains unclear.

The situation in Russia, specifically is the result of intentional actions from the economic bloc in the Moscow government. Specifically, Elvira Nabiullina and Anton Siluanov, as well as other “members of the team” of Alexei Kudrin. All of these individuals have known ideological and administrative ties to the Higher School of Economics, and through it to their Western Curators, to which they’re directly associated.

This group (the liberal part of the Russian elites) intentionally led the Russian economy to a devaluation of the ruble. In order to do so, they exploited the situation in the world economy, which currently combines the onset of a recession, the coronavirus panic, the decline in demand for resources. This was technically done through the employment of the market instruments.

Several years in the past, the Russian Central Bank entirely and transparently published the instruments and actions in response to all possible financial scenarios. As a result, it could be deemed that the actions of the regulator are public and fully consistent with the published instructions. This has been repeatedly used by international speculators. For example, in 2014, when the ruble fell previously.

A significant part of the liberal economic bloc supports the devaluation of the ruble, as it believes that it will allow to preserve the budget amid the falling energy export revenue. The same liberal bloc has little interest in solving the actual problems of the population: the reduction of purchasing power, the climbing prices in the domestic market. This can be easily seen in the rising fuel prices, as well as the subsequent increase in prices for all sectors of the national economy. The current situation will also lead to an increase in inflation, which the Russian Central Bank declaratively fights against. Thus, the regulator is forced to undermine its own policy from the previous period.

The formal motivation for this is the following: the liberal bloc claims that it expects a further decline in the global economy, and it says it is needed to keep financial reserves in order to use it in the event of further deterioration of the situation. However, if the Russian economy falls into a peak crisis as a result of these actions, the collected resources will not be enough to stop the impending further collapse.

A metaphor can be made here, with coronavirus panic and the possible infection – if an individual begins undergoing an intensive traditional therapy at the first symptom, then it is highly likely that the disease will pass in a mild form. If treatment begins only when the situation has, more or less, gone out of control, then the chance of death is quite significant.

In many respects this situation coincides with the political changes in the country and the on-going constitutional amendments. Despite the fact that some of them were partially blocked (for example, the inability to own foreign property for officials and members of parliament), they provoke a hysteria of the liberal portion of the political elites. The economic decline will undermine Putin’s approval rating. As a result, the liberal elite is attempting to exploit the current situation to achieve its political interest and fight against the so-called ‘patriotic part’ of the Russian elites.




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