by Tom Luongo, Russia Insider:

Probably not on a global scale or as the reserve currency, but between America’s anti-trade policies, Russia’s financial and monetary hawkishness and Moscow pushing for trade in national currencies with its neighbors and Asian powers the ruble is in a decent position to become a regional reserve currency — something PM Medvedev has revealed the government is actively working toward

The Russian ruble moved sharply this week as the global equity and commodities rout continues in the wake of the Federal Reserve raising interest rates.

Russia’s central bank over-reacted to a rise in inflation as the global economy moves towards a chaotic and politically dangerous 2019.

Oil prices are moving in sync with equities as the markets have entered a panic phase anticipating a global recession next year. Normally the Ruble is very strongly tied to oil prices. But as I showed in an article just before Thanksgiving, the ruble didn’t respond at all to a drop in Brent Crude from $80+ per barrel to around $60.

Amidst a 38% drop in the price of Brent Crude since October, the ruble has fluctuated in a 4% band around 67 to the dollar. This is shocking stability given the volatility in oil prices.

Ruble weakness from earlier this year was an over-reaction to heightened sanctions by the U.S. especially at a time where the threat of further sanctions on Iran and Venezuela’s collapse kept prices high.

Oil’s Outlook

And now it is catching up to this drop in oil prices with this week’s weakness. Oil prices are unsustainable above $65 per barrel amidst this level of supply.

They are equally unsustainable below $40 per barrel for just about everyone due to budget constraints (the Saudis) or debt-servicing (U.S. Frackers).

Since free-floating the ruble back in late 2014, Russia has been less and less affected by the fluctuations in oil prices. Because domestic costs are paid in rubles and income earned in dollars is offset by the weaker ruble.

It is government expenditures which suffer during waves of lower oil prices. But this year’s high prices have swelled Russia’s state coffers, running a 2.1% of GDP budget surplus this year.

Russia has an auto-budgeting system based on oil tariff revenues the budget will adjust based on anticipated oil prices.

And given the announced 1.2 million barrel per day cut from OPEC don’t expect the Russians to budget near $80 per barrel for 2019. That was a bearish signal, a sign of weakness.

Energy makes up the bulk of the country’s exports but that proportion is falling steadily as other industries mature. In 2017 oil/gas made up just under 60% of exports down from 69% in 2014.

They’ll likely be up as a percentage this year because of higher prices, but non-resource exports hit a record $147 billion this year, according to a recent statement from Andrey Slepnev, Chief Executive of the Russian Export Center.

That’s the important part.

The double whammy of increased sanctions (with threats of even more) and lower prices should have sent the ruble skydiving similar to what we saw this year with the Turkish lira.

I’m sure that’s been the hope on Capitol Hill.

But we haven’t and that speaks to the growing proportion of Russian trade settling outside the dollar. Russian exports continue to grow thanks to the weaker ruble and Putin’s continued growing stature as a statesman.

This is having the positive effect of opening up more markets for Russian goods and working with countries willing to skirt U.S. sanctions.

The Real Ideological War

Trump and Putin are locked in an ideological war of how to conduct trade now. And the shoe, nominally, is on the other foot. I have to marvel at Trump turning mafioso, punishing people for doing business with anyone but him while Putin pulls a Dale Carnegie looking for wins where he can get them.

Trump has his stick. Putin offers carrots.

It’s a sad commentary on what’s become of the U.S. that Trump believes he can bully his way to remaking America in his image. He talks a lot about America being respected again. But that’s not the sense I get when I look around the geopolitical game board.

In fact, it is the opposite. Trump may get obedience and he can choose to see deference to the U.S.’s power as ‘respect’ but it’s not. It’s resentment. And he should be smart enough to know this.

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