Commodities, Currencies, Emerging Markets, Energy, Funds / ETFs, Stocks

Investors Flee Russia As Recession Deepens Due To Plummeting Oil Prices

The persistent decline in oil prices that keeps pressure on the Russian ruble will further deepen the recession of the Russian economy, Moody’s reports. 

kremlin moscow russia pixably free domain

According to the rating agency the Russian economy is in a recession and if the current macroeconomic and geopolitical situation doesn’t change soon, especially with respect of oil prices and the country’s currency, it will only delay the recovery of the economy in the next year.

Moody’s claims the Russian economy will decline by 3% this year while the growth will be flat next year. Overall, the sanctions will cost Russia 1.0-1.5% of real GDP before 2020.

Russia’s GDP contracted 4.6% in Q2 from a year earlier after a 2.2% decline in Q1.

The external environment is very difficult: geopolitical tensions, sanctions, rising capital outflows, a sharp drop in economic activity, a strengthening of restrictive and regulatory moves by the authorities,

said Alexei Kudrin, a former Russian finance minister.

According to Bloomberg:

While Russian officials say publicly the worst of the economic turmoil has passed, they say in private that the situation is fragile at best and the central bank’s $358 billion in reserves could be drained further if crude prices continue to drop.

It seems investors have lost faith in Russia as they have been transferring their assets out of the country. The ruble is the biggest decliner among emerging market currencies during the past 3 months.

Investors don’t want to take on the risk of dealing with Russia and just go somewhere else (…)

A market that is so dominated by commodity exporters is not too appealing for foreigners at a time when energy prices are dipping lower,

Andrey Shenk, an analyst at Alfa Capital, said on Monday.

According to Financial Post:

Traders pulled $23.2 million from the Market Vectors Russia ETF last week. That followed outflows of $34.7 million during the prior five trading days in the biggest outflow in two months, according to data compiled by Bloomberg. Short interest in the fund rose to 8.9 per cent of shares outstanding, a three- month high. The fund has fallen 18 per cent since a May peak.

Russia is now likely in recession with GDP growth expected to decline 3.4 percent this year, says the IMF in its annual economic assessment. Mission Chief Ernesto Ramirez Rigo, explains how Russia’s economic woes are largely due to the dramatic drop in oil prices, and sanctions in response to developments in Crimea and Ukraine.

In the meantime, CNBC experts see oil price as low as $30 a barrel.

West Texas Intermediate crude futures broke below their 2015 low this week and are trading around $42, a more-than-six-year low. The bottom in this market has been elusive, with Wall Street targets consistent in that they have been missing the mark, as oil plunged into the $40s after roaring back to the $60s in a head fake rally during the spring.

Now, the next mile marker for the futures market appears to be on the downside, with oil heading toward the $40-per-barrel level. Many traders then expect to see prices settle somewhere in the $30s before a bottom is reached.

According to report published by Citigroup in February, oil as cheap as $20 a barrel could be around the corner in 2015 while Gary Shilling, a US consultant, suggested prices could drop as low as $10 per barrel.

Of course, quite how low prices can actually fall partly depends on which producer you’re speaking to. While developing economies such as Venezuela have high costs, meaning anything under $125 per barrel is a bit of a stretch, many super-efficient producers in the US and the Persian Gulf could keep going, even if prices drop below $20 – for some, that figure’s as low as $10,”

City AM reported.

Also according to Business Insider we may go back to $15 or $20 oil price level:

Oil prices have hit six-year lows, and Cumberland Advisors’ David Kotok thinks the worst may be yet to come.

We could go back to $15 or $20, this is a downward slope, we don’t know a bottom,” he said Monday.

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