March 7, 2016

The Russian ruble began to stabilize in February after an episode of strong volatility in mid-January. The currency took a dramatic fall to an all-time low of 82.4 RUB per USD on 21 January, then began a gradual stabilization in the following days. Toward the end of February, the ruble gained some of the ground lost and closed the month at 75.1 RUB per USD.



The gains registered in the exchange rate in February were driven by a response to speculation that an agreement would materialize between Russia and Saudi Arabia—along with other oil producing nations—to cap oil production in order to stop oversupply and shore up falling oil prices. On 16 February, the oil ministers of Qatar, Russia, Saudi Arabia and Venezuela held talks in Doha to agree to halt oil production at the levels recorded in January. The speed of the deal took markets and investors by surprise, and they were skeptical about whether the provisional agreement would gain wider acceptance. Oil prices responded positively to the nascent accord and began to rise from the lows observed in January, yet the agreement has failed to prop up prices significantly. After dropping to an over-a-decade low of below USD 28.0 per barrel in late January, oil prices have rallied about 35% and, at the time of writing, they continue to rise.



While the deal between Russia and Saudi Arabia has not been officially agreed and there are still significant hurdles to overcome—convincing Iran will not be an easy task—it has been enough to see some investors reverse their pessimistic bets against the oil price. Meanwhile, adding to the nascent euphoria, on 2 March, Venezuelan Oil Minister Eulogio del Pino stated that over 15 countries were preparing to attend a meeting to discuss possible output freezes. In addition, the press has reported that other members of OPEC are in talks to meet with other producers in Russia on 20 March in order to take part in the negotiations to cap production. In a recent conference in Abuja, Nigerian Minister of State for Petroleum Resources, Emmanuel Ibe Kachikwu, underlined that there will be a dramatic price movement when the meeting takes place.



Cooperation between OPEC and Russia to halt production could prevent the current supply glut from expanding. Still, significant uncertainty persist. Analysts are skeptical about freezing oil output at January’s levels, as many believe it will do little to reduce the supply surplus, especially if Iran and Iraq are reluctant to join the deal. Iran, which intends to increase its exports following the end of international sanctions that took place earlier this year, has repeatedly said that the country would not give up its share of the market.



The Consensus view of the analysts we polled is that oil prices bottomed out in the first quarter of this year and forecasters expect a gradual, albeit slow, recovery in prices in the following months (see the most recent FocusEconomics Consensus Forecast Commodities report). However, the risk of persistent low oil prices is high and this will further cloud the outlook for the Russian economy. As the Central Bank stated in its latest meeting, if oil prices remain low for a prolonged period of time, the economy will have to undergo a heavy adjustment to the new conditions.

FocusEconomics Consensus Forecast panelists expect that the Russian ruble will stabilize in the coming months, helped by a tight monetary policy and a gradual recovery in oil prices. Analysts see the ruble ending this year at RUB 70.8 per USD and the panel projects an exchange rate of RUB 67.4 per USD at the end of 2017.