Azernews.Az

By Bloomberg

Ruble sentiment is being increasingly driven by oil rather than Ukraine amid the diminishing threat of fresh sanctions against Russian President Vladimir Putin.

The ruble has climbed 10 percent this month, tracking an 11 percent rally in Brent crude. The nation’s local bonds, known as OFZs, handed investors 18 percent this month in dollar terms, the most of all emerging markets, according to data compiled by Bloomberg.

While the third Ukraine cease-fire in six months is at risk of crumbling after separatists seized a strategically important town in the east and were accused of failing to withdraw heavy weapons from the front line, the U.S. and European Union have held back from enacting new penalties against Putin.

“Europe doesn’t want to escalate the situation and new serious sanctions against Russia are highly unlikely at this point,” Konstantin Artemov, who oversees 16.8 billion rubles of bonds at Raiffeisen Capital in Moscow, said on Tuesday by phone. “The Ukraine risk premium in Russian assets is declining and we’re left with oil and the economy as the key drivers.”

Debaltseve Loss

The latest cease-fire came into effect on Feb. 15, yet fighting in Debaltseve didn’t end until government forces were forced to withdraw three days later. Ukraine said on Tuesday a cease-fire with pro-Russian separatists isn’t working as it disputed an announcement by rebel groups that they are removing weapons from the conflict zone.

Those transgressions hadn’t stopped the rally that pushed the yield on Russia’s January 2023 securities down 1.34 percentage points this month through the end of last week. The yield jumped 76 basis points on Tuesday to 13.32 percent the first trading day after Moody’s Investors Service lowered Russia’s credit rating to junk. It rose to 13.59 percent by 11:42 a.m. in Moscow.

This has dented a return of confidence in Russian assets driven by oil’s rebound from a six-year low of $45.19 a barrel on Jan. 13, to trade at $58.83 on Wednesday. The ruble and government bonds rose on Feb. 16 when the EU added an additional 19 people and nine organizations to its blacklist and said that work is “currently ongoing” on potential “further appropriate action” against Russia.

“When markets are in a positive mood, they ignore the war but oil is a key fundamental variable for Russia, so in theory the ruble should track it,” Viktor Szabo, a money manager who oversees $12 billion of developing-nation debt at Aberdeen Asset Management Plc in London, said by e-mail on Tuesday. “Russia just looks crazy cheap compared to the fundamentals.”

Oil Correlation

The ruble averaged 39 to the dollar last year. Five-year government notes yield 13.84 percent versus a mean 8.5 percent over the past two years. The Micex Index of Russian equities trades at 5.8 times predicted 12-month compared with a multiple of 11.9 for the MSCI Emerging Markets Index.

The correlation between the Russian currency and the price of crude has been reestablishing itself and was at 0.4 on Tuesday, the strongest since August 2013, according to data compiled by Bloomberg. A reading of 1 means that two assets move in lock step.

Brent crude has fallen from above $115 a barrel last June when the ruble was trading at about 34 to the dollar. Russia gets about half of its budget revenue from oil and gas industries.

Sanctions Threats

“Russian assets have pretty much removed Ukraine from their equation as oil is now the main driver,” Lutz Roehmeyer, who oversees $1.1 billion of assets as a money manager at Landesbank Berlin Investment GmbH, said by e-mail on Tuesday.

Deputy Defense Minister Anatoly Antonov is the highest- ranking official on the expanded blacklist that now includes 151 people and 37 organizations. Those on the list are barred from traveling to the 28-nation EU or accessing bank accounts in the bloc.

U.S. Secretary of State John Kerry on Saturday warned more sanctions may be imposed if violations of the cease-fire are maintained. EU President Donald Tusk said the previous day he’d start consultations on new steps “to increase further the costs of aggression on eastern Ukraine” in response to continued “ruthless attacks” by the rebels.

“Further serious sanctions would mean Russia’s transition to the status of Iran which isn’t in Europe’s plans as it would make co-existence with such a major neighbor very difficult,” Andres Vallejo, an asset manager at Kapital Asset Management in Moscow which oversees 175.4 billion rubles, said by phone on Thursday.