What should Russian investors be afraid until the end of the year?

President of the Institute, Marcel Salikhov gave an interview to Yango. Pro magazine about the risks of falling oil prices.

What is affecting oil now?

«The main factors that have the greatest impact on oil prices, in fact, are still the same — the situation in the global economy (demand factor) and the supply response in a broad sense (OPEC +, investment activity of major oil companies, etc.)», Marcel Salikhov, President of the Institute for Energy and Finance explains. — In May-June the global economic activity rose rather quickly from the quarantine lows — faster and stronger than many expected. However, already in July — August, gradual stabilization at lower levels was observed. An increase in the incidence of COVID-19 has begun in a number of countries, and fiscal stimulus programs have often ceased to operate — that does not allow counting on a rapid recovery scenario, which is usually called V-shaped recovery.
The key short-term price factor remains the situation with the coronavirus, the main risk is a large-scale second wave of the pandemic and the return of quarantine restrictions in large economies.

On the supply side, the OPEC + agreement continues to function more or less normally and supports the market. The level of implementation of the agreement remains in the range of 85–90%, which is quite good. Other producers, in particular US shale producers, remain low in investment activity and have not increased supply.

Is a deep fall possible, like in March?

— The dramatic drop in oil prices was associated with the simultaneous action of two factors — the coronavirus pandemic and the temporary collapse of the OPEC-plus. Both factors were completely incomprehensible to the market at that moment, the level of uncertainty increased sharply. Therefore, happened what happened, — explains Salikhov. — Now the situation has changed. There is a scenario of «new waves of a pandemic», but the effects of this are more or less clear. There is an understanding the expected timing of vaccine release. Eight vaccine projects in different countries are in the third phase of clinical trials. That is, we are talking more about the time factor. Therefore, the level of uncertainty about the coronavirus has dropped significantly compared to March. The collapse in oil prices in March also significantly «strengthened» the incentives for cooperation within the OPEC-plus. Therefore, the scenario of dropping oil prices again to $ 15–20 looks very unlikely.
Our baseline forecast is that Brent will remain within the current range of $ 40–45 per barrel. On the whole, this level suits OPEC and is quite comfortable for consumers.

What will happen to the Russian economy and financial markets if prices do fall?

— Due to the OPEC + deal, oil production in Russia in 2020 will be 10% lower than last year. Therefore, the inflow of foreign exchange into the foreign exchange market and tax revenues will be lower even with the same oil price, — states Marcel Salikhov. — Declining oil prices, all other things being equal, leads to decreasing inflow of foreign exchange into the foreign exchange market and, thus, to depreciating the ruble. According to our current estimates, if the oil price drops to $ 30, the RUB / USD rate will be in the range of 80–85. Considering the scale of the oil prices fall, this is a very good result. The main guarantee of relative stability of the exchange rate will be the Central Bank policy /Fiscal rule: the regulator will increase sales of foreign exchange from reserves, partially offsetting reduction in inflow through the export channel.

— Since many investors perceive the Russian market as primarily a commodity market in the first place, this situation will lead to a revaluation of all financial assets, even formally not related to the oil sector. In these conditions, the Central Bank will definitely not reduce the key rate and, possibly, will be forced to raise it, — the expert believes.

The Bank of Russia announced that it no longer takes oil prices as a basis when developing forecast scenarios. Does this mean that oil is no longer important for the Russian economy?

— Indeed, the fact that the Central Bank refused to use oil prices as a key exogenous parameter in developing scenarios is an innovation. However, to a certain extent, this is slyness, — says Marcel Salikhov. — The «Main Directions of the Central Bank’s Monetary Policy» states that the key fork is «the preconditions regarding the rates of actual and potential GDP in the Russian and world economies on the forecast horizon." But the projected growth rates of world GDP and projected oil prices are closely related. With high growth rates of world GDP, there will be high oil prices. Low growth rates mean low oil prices. Therefore, we are talking about the same thing, but simply in different words. I think that the Central Bank simply wants to abandon a detailed discussion of the situation on the oil market and focus more on discussing macroeconomic factors. Therefore, such the innovation was chosen. This means little in terms of the Central Bank’s policy and its actions in these or other conditions.

While oil prices decreasing, the regulator will try to act in the same way like this year — to pursue a stimulating policy by lowering the rate, — Salikhov is convinced. — Devaluation sentiments and expectations are limitations. That is, with a strong devaluation, panic and «flight» from the ruble may begin at some moment, which begins to be self-sustaining. This is the main risk for the Central Bank. Therefore, if there is no panic, you can lower the rate, as happened this year. If panic breaks out, the rate has to be raised even at the expense of the current economic dynamics.

Of course, the Central Bank also doesn’t know whether such a panic and / or, for example, a massive exit of foreigners from the Federal loan bonds (OFZs), could begin. This is the art of monetary policy to a large extent.