The Insidious Saudi Prince and the Weak Ruble

10 April, 03:50 PM
Muhammad ibn Salman (Photo:Bandar Algaloud/Courtesy of Saudi Royal Court/Handout via REUTERS/File Photo)

Muhammad ibn Salman (Photo:Bandar Algaloud/Courtesy of Saudi Royal Court/Handout via REUTERS/File Photo)

Suddenly, without declaring war, the OPEC countries announced a reduction in oil production by 1.1 million barrels.

In global markets, it was supposed to be a short, quiet pre-holiday week, when investors and speculators went to the Caribbean to play golf on the eve of Easter. But Saudi Arabia and Co. decided to spoil the holidays. In addition to not celebrating Easter himself, the Saudi crown prince is still profoundly offended by the Americans and Europeans, who cannot forgive him for cutting a journalist into pieces. Now he has more affinity for his Chinese comrades, who are not embarrassed by such trifles. He also didn't like that oil prices fell below $80 per barrel amid talk of a potential recession, which worsened after the bankruptcy of several Californian banks.  In general, the prince decided it was unfair that hipsters from California were driving banks to bankruptcy, and now he had to suffer.  But suddenly, without declaring war, the OPEC countries announced a reduction in oil production by 1.1 million barrels. With Russia's announced, but not implemented, reduction, the market should remain at 1.6 million barrels.  But no matter how hard the prince tried, he could not spoil the mood of stock traders. On the morning of Good Friday, the S&P500 index was at 4,105 points, having gained more than 50 points over the past week.

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The paradox of this decision by oil producers is that it pushes oil prices up,

To the Russian budget, a 5% increase in the price of oil looks like a dead duck

OPEC raises the same risks of a recession, in which Saudi Arabia will only dream of $75 oil prices. One way or another, prices have risen. They are fixed somewhere around the mark of $85 per barrel of Brent oil. The prince's plan is working in the short term because they have reduced production by a smaller percentage than the price increase.  However, on the other hand, prices on the oil market simply returned to the "before the Californian bankruptcy" level, so compared to a month earlier, the country's oil exporters are still in the red.  Such a solution, in theory, should help Putin. There have already been reports that, in some places, the prices of Russian oil have begun to break through the established ceiling.

It is true that, to the Russian budget, a 5% increase in the price of oil looks like a dead duck. Released data for March confirm a stable level of decline in oil revenues by approximately 50%. The ruble also began to pile up in recent days. On Friday morning, the exchange rate was 82 rubles per dollar.  If you do not count the first panic days at the beginning of the war, when Ukrainians and White House analysts hoped that the panic would destroy the house of cards of the Russian economy, the ruble rate reached a historic low — going from 77 rubles to 82 rubles per dollar over the last week for no apparent reason. Compare this to the autumn when the ruble exchange rate was at 60 to the dollar. This puts the Russian ruble on the list of the worst currencies of 2023, on a par with Zimbabwe. There is no clear answer to why the ruble decided to fall, especially against the background of rising oil prices. One explanation could be the exit of a number of companies from the Russian market. Notably, this includes Shell. Russia also has a budget deficit problem.

In Ukraine, Western countries and Japan are aiding in the budget deficit problem. This treatment shows its effectiveness, differing from the Russian version as much as scientifically proven medicine differs from folk methods that force the head of the Central Bank of Russia, Nabiullin, to apply a plantain leaf anywhere. As a result, the reserves of the National Bank, after receiving several tranches, reached a record level not seen since 2011. Reflect on the paradoxical situation of the reserve's growth during the war.  Emphasizing the lack of reasons for the devaluation of the hryvnia, the IMF forecasts that currency devaluation would help with budget financing. This approach may force some Ukrainians to hold their hearts, because they did not see the hundreds of billions of dollars of the future Marshall Plan in the IMF forecast.

The only problem is that until the decision is made, the IMF will never include such a level of support in its forecasts. The forecasts already don’t consider the effect of European integration and the investment inflow that will result from it. They won’t do so until the EU decides to begin the entry procedure. The cash hryvnia continues to behave weirdly. At first, it strengthened to 37.0 hryvnias per dollar, actually equaling the official rate and causing many jokes that the black market could suddenly become stronger than the official one. That’s true, such strengthening turned out to be short-lived, and now the exchange rate on the black (gray) market has fallen back to UAH 37.7 per dollar. Now the difference between the black and official markets looks healthier. Even if it is minimal, it is very comfortable for the National Bank.

P. S. If you want to achieve excellence, you can get there today. As of this second, quit doing less-than-excellent work.

Thomas J. Watson

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