Rouble weakness/oil: combat stress will force Russia to pump more

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The rouble is a petrocurrency. Crude oil is a quarter of Russian exports, the largest component. Brent, still the international benchmark for oil, has risen by a fifth in the past two months. Despite that, Russia’s currency has sunk nearly as much against the dollar. On Monday alone it lost some 2 per cent. One might expect the two to move more in tandem.

Russia must be feeling increasingly desperate to lift exports of crude. But it has promised Opec+ to cut its output by 500,000 barrels a day from this month.

Do not blame the coalition of western states for its $60 a barrel price cap on Russia’s Urals blend. That clearly has not worked. The price of Urals has climbed to more than $73 in recent weeks, narrowing the discount with Brent. Indian buyers, for example, are willing to pay up for Russia’s crude from producers such as Lukoil and Rosneft, according to analysis by the Financial Times.

In rouble terms the international Urals price has soared 60 per cent since mid-June. The promise to Opec+ leaves Russia pressing its nose against the glass of a metaphorical sweet shop window.

It could use more export revenues. Its current account surplus has dwindled in parallel with falling energy export revenues and higher arms imports. Inflation may start rising. Producer price indices could increase by 20 per cent year on year in the second half, believes Capital Economics, a consultancy. Russia’s central bank president Elvira Nabiullina may soon raise interest rates.

No surprise, local share prices on the Moscow Exchange have soared as an inflation hedge. State-owned Rosneft’s stock is up more than 50% this year in rouble terms. Even global energy shares of a typically sedate kind have again found their mojo. The MSCI all-country world energy index has outrun its broader world market benchmark since the spring.

The weak rouble offers Russia an incentive to boost oil exports just when Saudi Arabia reduces supply, partly to support this fellow member of Opec+. That relationship is not sustainable.

The Lex team is interested in hearing more from readers. Please tell us what you think of rouble weakness in the comments section below.