About oil, ruble rate and herd immunity: ‘Tomorrow will be better than yesterday’

Blogger and economist Albert Bikbov’s column

About oil, ruble rate and herd immunity: ‘Tomorrow will be better than yesterday’
Photo: Maksim Platonov

Compared to April oil shocks and turbulence of currency rates, there is some lull now. Oil prices are recovering, the ruble has grown, though not much. In his column for Realnoe Vremya, famous Tatarstan blogger and economist Albert Bikbov explains how the Tatarstan has suffered from the coronavirus, what awaits the world and what to choose — economic recovery or quarantine.

Stronger oil is an “intravenous bag” resuscitating the Russian and Tatarstan economy

I would like to start a review of the current situation with positive moments. Now oil prices are at an acceptable level — about $40-42 per barrel (Editor’s Note: when the text was prepared, Brent traded at $42,23, while WTI — $39,66 per barrel). The OPEC deal, which was finally sealed, influenced this, of course, thanks to which it became possible to stabilise the situation in the oil market.

We all understand how important it is for the budget of our country drafted with $40 per barrel. Considering that the Russian and Tatarstan economy is very dependent on production and sale of oil and its derivatives, now we are receiving a positive effect. Let’s remember that when oil almost fell to negative numbers five months ago, there was real panic in the markets. And then the digit 40 seemed almost an impossible dream. Now we have it — and it is very untimely.

The budget of both Russia in general and Tatarstan in particular is carrying huge losses now. Last week it was made public that the republic didn’t receive about 100 billion rubles of tax and non-tax payments. Moreover, I heard that about 30 billion weren’t received precisely in the consolidated budget of the republic (as a considerable part of incomes go to Moscow). So the amount of the Russian Ministry of Finance’s transfer to cover even a half of a budget deficit of 13,5bn rubles.

Photo: tatneft.ru
$60 or even $70 per barrel are preferable, of course, but we should be realists because $40-42 is already not bad

Therefore it is very important for us that not only prices but also real demand for oil must recover. We will come to the market’s remission earlier than in a year (and likely in two). It is too optimistic to wait for recovery till the end of 2020. The fall in oil consumption in the world is evaluated at about 8%, which can’t win back in a few months.

As a result, now we receive such a structure: yes, the first half was very scary. Now, there are problems: transport traffic is staying idle, demand for oil products has been frozen because of coronavirus restrictions. But if nothing changes, the economy of our republic, its oil and petrochemical complex — both Tatneft and TAIF Group enterprises — will reach acceptable indicators by the end of the year.

In this respect, at the moment I stick to a positive outlook. $60 or even $70 per barrel are preferable, of course, but we should be realists because $40-42 is already not bad.

Ruble rate: voting is over, can we let it go?

There is a version spreading in some circles that the Central Bank artificially kept the ruble rate in certain ranges to provide the population’s loyalty to the current power before the national voting on amendments to the Constitution. I think that this issue anyway had some politics but it unlikely determined the ruble rate (Editor’s Note: when the text was prepared, USD/RUB was sold for 70,94).

We should understand the paradigm of thinking of the Central Bank. And it looks the following way: the rate must be fixed by market methods, it must be free. If the regulator’s goal in itself is to pursue an iron course by all means, it will “burn” all its reserves and will receive an awful blow in the end.

This is why my opinion is: yes, the Central Bank tried to keep the rate in spring because if it hadn’t done it, the dollar would have skyrocketed to 100 rubles. As we remember, three months ago the market was full of dull predictions that the dollar was about to exceed a hundred.

Photo: admnvrsk.ru
If the regulator’s goal in itself is to pursue an iron course by all means, it will “burn” all its reserves and will receive an awful blow in the end

Now we see that the rate has grown, but we can’t say it has grown to critical numbers. Yes, the dollar has gone above 70, but the situation is quite stable and seems not to need injections. The Central Bank won’t now either burn or spend gold reserves because this usually turns out bad. If you remember when Soros attacked the British pound, the Bank of England fought for the pound rate till the end. While Soros kept pressing and earned a billion dollars almost in a night. The rate augmented so much that it took the British economy much time to recover from this strike.

It is very dangerous to keep the rate artificially. The market is like an ocean: it can be carved, one can try to build a fence around it, but all this is useless. It will anyway either leak (at best) or take you to a dangerous vortex (at worst).

If not the CB, who: three factors keeping oil

I am sure that at this stage of the turn of events, even if the Central Bank doesn’t interfere, the ruble rate will not start to grow uncontrollably. It is quite naturally restrained by three factors.

  1. Stabilised oil price compared to the horror 2-3 months ago. If the ruble needed “crutches” then, now it can stand on its own.
  2. Growth of demand for oil, its derivatives, motor fuel. Demand is recovering, we see borders are opening, the amount of domestic freight shipping is increasing around the world, the economy is reviving.
  3. Consumer expenses are growing as well as, most importantly, consumer expectations in Russia.

What to choose — total quarantine or economic recovery?

I will remind you that a month ago I forecasted a surge in the incidence in the USA after a wave of protests. So this did happen. Now the States have reached both the biggest growth and mortality statistics. And, undoubtedly, the situation remains dangerous — both there and here. So why have people been allowed to go out? Measures have been softened almost in all countries of the world (though in Kazakhstan and Israel went in the opposite direction — the countries are closing again). But we should understand that people are afraid. People are tired everywhere, around the world. Coronavirus restrictions are great stress, many can’t stay home, almost under house arrest anymore.

Photo: Maksim Platonov
Coronavirus restrictions are great stress, many can’t stay home, almost in house arrest anymore

I told you above that our budget is carrying huge losses. Neither is the American budget managing to patch the holes, the situation there can be called critical. The American economy is oriented to the sphere of services, which collapsed with the pandemic. So the Russian situation can still be called favourable.

How to save the economy amid the unabated coronavirus? There is no vaccine yet, and sceptics doubt that it will be created till the end of the year. Many consider (and I agree with them in general) it is impossible to put people in quarantine again — they will be very hostile to this. And the economy is unlikely to handle a second wave of the lockout as well.

I think that the only chance in this respect is to hope for herd immunity: as soon as the number of cases reaches 50-60%, chances of infecting will reduce many times. And it is also a very important chance, moreover, not only from a perspective of medicine and biology of a man but also from an economic perspective. Of course, this carries a lot of risks, and we don’t have a choice now.

While now, we should deal with recovery. I recently saw a transmission of a meeting of shareholders of one of the biggest Tatarstan enterprises. And it inspired me hope: the top management openly talked about its problems — a fall in revenue, a reduction in net profit, fewer supplies. At the same time, most statements were about good moments: investments and prospects. They aren’t running, asking for help, they aren’t falling into depression. They say: “We work for the future, while everything in the future will be much better than now”.

As a song puts it, “tomorrow will be better than yesterday”.

By Albert Bikbov