The Tie That Binds
Whereas the macroeconomic links between Russia and oil are well known, I consider that it is useful to evaluate how they work. Because Russia produces so much oil and gas, it’s the oil price that determines export and government revenues. The ruble is used as a security valve to control the impact of these components on the economic system, and that, in flip, determines absolutely the degree of dollar GDP.
THE Importance OF HYDROCARBONS
Russia produces just below 10 mln bpd of oil, as Ailing as 550 bln m3 of gas (also around 10 mln boepd) and enormous amounts of different commodities, which lately have broadly followed oil costs up after which down. The share of Russian GDP made up of oil and gasoline is a moot point, as a lot of the hydrocarbon production is offered cheaply on the domestic market, enabling other sectors to reap the benefits. A method round this is to look at the full value at world market prices of the oil and gas sold. In 2008, this was $590 bln, or 36% of 2008 GDP; this 12 months, I forecast it to be $340 bln, or 27% of 2009 GDP.
Russia exports around 5 mln bpd of oil, 2.5 mln bpd of oil merchandise and 200 bln m³ of fuel, generating export revenues of $280 bln from hydrocarbons in 2008, or 63% of whole export revenues. General, commodities account for greater than ninety% of exports. In consequence, it is the oil worth that acts as the key determinant of the trade and current account balances.
Oil determines the kacha oil price today reference RTS Index degree. For much of its existence, a fairly good rule of thumb for the level of the RTS Index has been 22 instances the oil worth minus 200. This framework explains not solely the 2,000 point fall within the index in 2008<09, but also the 300 point bounce that we have enjoyed over the past couple of months.
Spreads are the primary secondary factor. Although spreads are themselves decided by the oil value (if the oil value rises $10/bbl from present levels, they move by around 75 bps, and if it falls, they rise by twice this quantity), the addition of spreads improves the R2 of an index model from 83% to 90%. A mannequin including spreads gives the truthful RTS Index degree as 16 instances the oil value
minus 250 plus 1,000 divided by the money bond unfold.
– To quantify the hyperlinks; I calculate that RTS income transfer up by round 9% for every 10% improve within the oil value. This is because 78% of the index is made up of commodity stocks, while the home stocks comprising the rest of the index benefit from the rising ruble, which moves up by a spherical 3% f or e very 10% i ncrease in t he o il p rice. Moreover, a s spreads are oil worth dependent, so too is the P/E ratio, as honest value moves 5% for every 10% transfer in oil.
– Take revenue unless you are an oil bull. At an RTS Index level of 800, the market is already pricing in $50/bbl oil and cash bond spreads of four hundred bps, that are fairly near present levels. A fall within the oil price to underneath $forty/bbl would drive the RTS Index right down to below 600, while a break above $60/bbl would take it up to 1,000. Investors who think that the oil value is prone to fall again over
the summer season ought to due to this fact look to take profit now.
– The macroeconomic framework will remain oil worth dependent. At market prices, Russia’s hydrocarbon manufacturing makes up one third of its complete stage of GDP, as well as half of federal authorities revenues and 60% of exports. As we’ve already proven, because of this the ruble has to be used because the balancing factor between the oil worth and the financial system.
– What may break the hyperlink between Russia and oil. Prior to now, the hyperlink kacha oil price today has been broken on the upside by geopolitics (the occasions of September 11, 2001) or a strong independent theme (international stability and the rise of the center class in 2007) and on the downside by collapse (Russia’s default in 1998) or concern (the YUKOS case). While US President Barack Obama’s reset of relations between the
US and Russia gives a good wind, it’s unlikely to overwhelm the skepticism ensuing from company governance scandals and low payout ratios, and the market is more likely to struggle to flee from its oil price dependency for the time being.
Writer Field Jeffrey F. Combs has 1 articles online
Jeffrey F. Combs, fifty two, MBA, a veteran of Wall Avenue (Morgan, Stanley; Lehman Brothers) has been living and investing in Russia since 1995. He’s a frequent speaker at Funding Conferences, and considered to be an authority on the Russian and CIS funding markets.
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