Russian equities have had their worst week since early-December, with losses of over 6 percent. But don’t look too far for the reason — world crude futures have fallen to three-month lows around $114 a barrel on worries that U.S. and world economic growth may not be picking up after all. They too have fallen 6 percent so far this week. Check out the following graphics showing how Russian stocks and its currency move in lock-step with oil prices:
If anything, the falls on Russian assets are outpacing the weakness on global crude oil markets in recent months, possibly because the jitters that caused last December’s massive falls have not been entirely overcome. Anti-government demonstrators are no longer hitting the streets but with President-elect Vladimir Putin to be sworn in next week, fears are the Kremlin may prefer squeezing more cash from energy companies to implementing the reforms the economy desperately needs. Latest plans flagged on Thursday to raise oil and gas extraction taxes would seem to confirm these worries and are hitting energy sector shares — half the Moscow index.
All this has widened Russian stock valuations to almost record levels against the broader emerging equity set. But that is unlikely to entice buyers if the oil price stays where it is — after all half of Russia’s revenues come from oil and it needs an oil price of around $120 a barrel to balance its budget. Chris Weafer, chief strategist at Troika Dialog puts it succinctly:
Russia does not have a strong enough domestic story to compensate for the commodities export risk