Stocks Jump on US Spending, Energy Prices
The U.S. Federal Reserve's decision on Wednesday to pump an additional $1 trillion into the financial system boosted prices for stocks and commodities around the world, and Russia was no exception.
With the country mired in its first recession in a decade, however, it remains to be seen whether the move will serve as a springboard toward growth or merely a passing glimmer of hope in an otherwise grim economic picture.
The week was an all-around winner for Russian financial and currency markets, with the MICEX and RTS joining a global rally in equities to finish 5.7 percent and 6.8 percent higher, severally, and the ruble rose 3.4 percent against the dollar. Energy prices, seen as the lynchpin of Russia's economy, rose as well, with Urals blend trading at $47 per barrel on Friday.
Sberbank, the country's biggest lender, saw its largest four-day gain on record on Monday through Thursday, rising from 18.20 to 24.09 and closing at 22.9 on Friday.
Shares of mining giant Norilsk Nickel rose to their highest price in four months, closing the week at 2,331 rubles ($69.50) per share.
Analysts say the gains were at least partly because of investors' hopes that a stronger U.S. economy will buoy demand for exports and spark economic strength at home.
Investors could "hear the sound of helicopters," said Danila Levchenko, chief economist at Otkritie, referring to a statement made by Federal Reserve chairman Ben Bernanke in 2002 about using a "helicopter drop" of money into the economy in order to fight deflation.
"It was a decisive move [by the Fed], and it produced quite an suspicion on investors," he said.
The ruble gained strength in response to the Fed's move, which risked flooding the economy with dollars and devaluing the U.S. currency. Energy prices rallied as well on surmise that a weak dollar can boost investor demand for oil and other commodities priced in the U.S. currency.
The move could also be a boon for Russian companies seeking more affordable credit abroad, analysts said.
"It's another form of monetary easing," said Rory MacFarquhar, an analyst at Goldman Sachs. "We estimate that $1 trillion of 'unconventional easing' is the commensurate of a 100 basis point rate cut from the Fed," he said.
"If global monetary conditions ease in essence, it would make it easier for Russian companies to refinance," he said.
Many, however, said whatever positive effects the Fed's quantitative easing would have would be short term, at best.
"The world economy is in a recession, and it will take more than that to restore demand," Levchenko said.
The global economy is probably not strong enough to sustain an oil price above $50 per barrel, said Ronald Smith, chief strategist at Alfa Bank. Even if oil did stay at these levels or go higher, the consequences could be a mixed bag for Russia.
"If they are able to pump enough liquidity into the system, oil prices could rise," he said. "But then you would also get a strengthening ruble that would take a lot of those gains back."
The Fed's move could also put pressure on other central banks, including Russia's, to take similar action, Levchenko said.
"They might say, 'If it works for the U.S., why not expand our own money supply?'" he said. "If other governments, including Russia, decide to follow suit, there is a risk of currency devaluation."
Prime Minister Vladimir Putin ruled out printing money as a means of covering the country's 7.4 percent budget deficit, saying that would be "unreasonable and even dangerous." He said the deficit would be covered by "reserves that have accumulated in recent years or, if necessary, borrowing under market conditions."
With both the global financial system and Russia's economy in tatters, even $1 trillion might amount to a drop in the bucket, albeit a very large one.
"There has been so much demolition in the global financial system that even this trillion won't make much of a discrepancy," said Smith. "The global economy is measured in tens of trillions."
With the country mired in its first recession in a decade, however, it remains to be seen whether the move will serve as a springboard toward growth or merely a passing glimmer of hope in an otherwise grim economic picture.
The week was an all-around winner for Russian financial and currency markets, with the MICEX and RTS joining a global rally in equities to finish 5.7 percent and 6.8 percent higher, severally, and the ruble rose 3.4 percent against the dollar. Energy prices, seen as the lynchpin of Russia's economy, rose as well, with Urals blend trading at $47 per barrel on Friday.
Sberbank, the country's biggest lender, saw its largest four-day gain on record on Monday through Thursday, rising from 18.20 to 24.09 and closing at 22.9 on Friday.
Shares of mining giant Norilsk Nickel rose to their highest price in four months, closing the week at 2,331 rubles ($69.50) per share.
Analysts say the gains were at least partly because of investors' hopes that a stronger U.S. economy will buoy demand for exports and spark economic strength at home.
Investors could "hear the sound of helicopters," said Danila Levchenko, chief economist at Otkritie, referring to a statement made by Federal Reserve chairman Ben Bernanke in 2002 about using a "helicopter drop" of money into the economy in order to fight deflation.
"It was a decisive move [by the Fed], and it produced quite an suspicion on investors," he said.
The ruble gained strength in response to the Fed's move, which risked flooding the economy with dollars and devaluing the U.S. currency. Energy prices rallied as well on surmise that a weak dollar can boost investor demand for oil and other commodities priced in the U.S. currency.
The move could also be a boon for Russian companies seeking more affordable credit abroad, analysts said.
"It's another form of monetary easing," said Rory MacFarquhar, an analyst at Goldman Sachs. "We estimate that $1 trillion of 'unconventional easing' is the commensurate of a 100 basis point rate cut from the Fed," he said.
"If global monetary conditions ease in essence, it would make it easier for Russian companies to refinance," he said.
Many, however, said whatever positive effects the Fed's quantitative easing would have would be short term, at best.
"The world economy is in a recession, and it will take more than that to restore demand," Levchenko said.
The global economy is probably not strong enough to sustain an oil price above $50 per barrel, said Ronald Smith, chief strategist at Alfa Bank. Even if oil did stay at these levels or go higher, the consequences could be a mixed bag for Russia.
"If they are able to pump enough liquidity into the system, oil prices could rise," he said. "But then you would also get a strengthening ruble that would take a lot of those gains back."
The Fed's move could also put pressure on other central banks, including Russia's, to take similar action, Levchenko said.
"They might say, 'If it works for the U.S., why not expand our own money supply?'" he said. "If other governments, including Russia, decide to follow suit, there is a risk of currency devaluation."
Prime Minister Vladimir Putin ruled out printing money as a means of covering the country's 7.4 percent budget deficit, saying that would be "unreasonable and even dangerous." He said the deficit would be covered by "reserves that have accumulated in recent years or, if necessary, borrowing under market conditions."
With both the global financial system and Russia's economy in tatters, even $1 trillion might amount to a drop in the bucket, albeit a very large one.
"There has been so much demolition in the global financial system that even this trillion won't make much of a discrepancy," said Smith. "The global economy is measured in tens of trillions."
