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. Last Updated: 07/27/2016

Ruble Move Called a Short-Term Boon for Oil Sector




The Russian government's effective ruble devaluation is good news for the country's languishing oil sector, which has long since lobbied for such a change of course, but any benefits could be short-term only, experts said Tuesday.


With revenues sapped by sagging global oil prices and investment out of the question due to exorbitant interest rates, oil companies have for weeks been screaming for relief from the government.


On Monday they got it.


The government's move to let the ruble float down against the dollar changes at a stroke the balance sheets of the country's oil majors on which the state is so dependent for tax revenues.


"The export of oil and petroleum products can now become profitable thanks to measures taken by the government and Central Bank," said Leonid Fedun, vice president of LUKoil, Russia's largest oil company.


The trend has been visible in share price movements in recent days. As signs that there would be a devaluation became clearer at the end of last week, LUKoil's share price rose along with that of Surgutneftegaz, another oil blue chip.


"The majority of oil companies have revenues in dollars but costs in rubles," said Matthew Thomas, an economist with Creditanstalt Investment Bank in Moscow. "There is an accurate perception in the market that oil companies will benefit across the board from devaluation."


In all, some 95 percent of the oil sector's operating costs are incurred in rubles, while around 50 percent of revenues are in dollars from exports, according to James Henderson, an oil and gas expert with the MFK Renaissance financial group.


The energy sector plays a critical role in Russia's economy. The slump of global oil prices to less than $12 a barrel has been a prime contributor to the collapse of state finances.


About a quarter of the government's hard currency earnings come from energy exports.


But weighed against the balance sheet benefits are the losses that companies will incur from the inflationary pressures likely to build up following the de facto devaluation, as well as from the generally negative light in which Russia is currently perceived as an investment opportunity.


"Investor decisions are being based right now on the overall macroeconomic situation in Russia, not on what the relative losers and winners are going to be from this devaluation," Thomas said.


Added Henderson: "If the cost of imports goes up and inflation in Russia starts to pick up, the question is how far inflation wipes out the effect of the devaluation.


"It's a short-term gain, but in the medium to longer term, the impact will probably be relatively neutral."


Recent gains in LUKoil and Surgutneftegaz were eaten away in generally bearish trade, and LUKoil was trading down 11.29 percent at $5.50 Tuesday.


Devaluation will also act as a double-edged sword on government energy-sector privatizations, analysts said, singling out the planned 5 percent sell-off in Gazprom as a classic example.


As the Gazprom stake has been valued at some 10.3 billion rubles, the corresponding dollar price tag will naturally fall, making bargain hunters even more likely to enter the tender.


But weighed against that is the reluctance with which investors are likely to view the prospect of putting eggs into the Russian basket.