What do they see that we don’t?
Russia’s economy has been shrinking five quarters in a row, though in the first quarter of 2016, it contracted at an annual rate of “only” 1.2%, after having contracted 3.7% in 2015, the longest recession in two decades. The budget deficit has swollen to 8.6% of GDP in April – way beyond the 3% the government is projecting for the year. It might require additional and unpopular budget cuts.
So the jump in oil prices recently, while not nearly enough, is a huge economic relief for the world’s largest oil & gas exporter.
The surge in oil prices has boosted the ruble, which had plunged late last year and early January. Now it’s back at 69 rubles to the dollar, where it had been in November, and there’s a sense that a currency crisis has been averted.
Putin’s pivot to the east with his energy policy has led to mega-contracts and projects with China, largely to supply oil and gas to the energy-hungry nation. Already, exports of crude oil to China soared 28% in 2015, which elevated Russia to China’s second largest supplier, behind only Saudi Arabia. China has become Russia’s biggest trade partner, accounting for 12.8% of Russia’s total trade.
The ties are also growing in the financial realm. Russian oil and gas companies have bought yuan-denominated bonds last year. And in 2014, the Central Bank of Russia signed a 150-billion-yuan ($23 billion) swap agreement with People’s Bank of China to allow both countries to directly settle their trade in rubles and yuan, without having to resort to the dollar.
So Russia is increasingly joined at the hip to China, and will be even more so as the new projects mature. But now Russia is fretting about the slowdown in China and a further devaluation of the yuan.
These worries percolated to the top on Wednesday at a Credit Suisse conference on emerging markets in Moscow.
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