‘Black Monday’ inflicts further damage on Russian markets

Skyscrapers of the Moscow City business district stand beyond a foreign currency exchange bureau displaying a U.S. dollar sign in Moscow. Source: Getty Images

Skyscrapers of the Moscow City business district stand beyond a foreign currency exchange bureau displaying a U.S. dollar sign in Moscow. Source: Getty Images

Amid turmoil on global financial markets, the Russian ruble fell to a historic low against the U.S. dollar on Aug. 24, while the key stock market index, the RTS, dropped 6 percent. Russian analysts say that there is little room for optimism while oil prices remain low.

As the shockwaves from the meltdown on the Chinese markets reverberate around the world, the Russian ruble has fallen to an all-time low against the U.S. dollar, while Moscow’s key stock market index, the RTS, shed nearly 6 percent on the news of the ruble’s plunge and falling oil prices in a day already described as a “Black Monday” for the Russian markets.

The sell-off on the Russian market was preceded by a panic on the world’s key trading floors. The Shanghai Composite closed 8.5 percent down, while the Dow Jones went down 6.08 percent, or 1001.24 points, setting an unwelcome new record: Before then it had never fallen more than 800 points in a single day.

However, overall, the plunge suffered by the Russian market turned out to be more significant than in most other countries.

“Since the start of the summer, the U.S. dollar rate has grown by 35 percent, and the euro by 41 percent,” said TeleTrade analyst Alexander Yegorov.

Experts agree that the main reason behind the devaluation of the ruble is the Russian economy’s dependence on the price of oil. On Aug. 24, 2015, Brent crude was trading at $43.54 a barrel, the lowest since the global financial crisis of 2009.

 

Main causes

BSK Express expert Ivan Kopeykin said the ruble’s sharp drop against the dollar and the euro at the beginning of the week was due to “yet another plunge on the Chinese stock market and falling oil prices.”

Even the decision taken by Beijing on Aug. 23 to allow some pension funds in China to invest up to 30 percent of their assets, estimated at $100 billion, in equities did not help the situation, he said.

Igor Kovalyov, an analyst with InstaForex, described the Russian markets as “in a nosedive” and laid the blame for the collapse on “the news of falling oil prices and instability generated by the situation on the Chinese stock market.”

According to Kovalyov, one of the reasons pushing oil prices further down was a statement from Iranian Petroleum Minister Bijan Namdar Zangeneh: “We will be raising our oil production at any cost and we have no other alternative. If Iran’s oil production hike is not done promptly, we will be losing our market share permanently,” he told Bloomberg.

Before sanctions against it were introduced in July 2012, Iran was the second biggest oil producer in OPEC. Some oil companies, including BP and Shell, have already expressed an interest in developing oilfields in Iran. At the same time, according to the International Energy Agency, global oil surplus already amounts to 3 million barrels a day.

 

Forecasts for the future

Russian analysts were pessimistic about the prospects for the immediate future, pointing out that with oil prices set to stay low, the road to recovery is blocked for now.

“It is important to note that the Russian budget is based on the price of oil of $50 per barrel. In the current conditions, there are no grounds to expect a recovery of optimism, therefore we estimate that the negative dynamic on the Russian stock market will continue,” said Igor Kovalyov.

According to Alexander Yegorov, “the probability that oil prices may fall to the 2008-2009 minimums is quite high and so far there are no objective reasons to expect a price hike, at least not until the end of the year”.

Furthermore, on Aug. 24, Russian Economic Development Minister Alexei Ulyukayev said oil prices may fall below $40 per barrel, echoing a similar forecast voiced earlier by the president of Kazakhstan, Nursultan Nazarbayev, who said that in the coming several years, oil was expected to trade at $30-40.

Freedom Finance’s head of operations on the Russian stock market Georgy Vashchenko is more optimistic, however: “There is a panic on the markets, but there are no grounds to be speaking of a crisis yet. A sell-off allows long-term investors to buy good assets on the cheap.” 

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