The escalation of the US-Iran conflict pushed the price of oil up
The US-Iran standoff may contribute to the strengthening of the Russian currency, experts interviewed by TASS suggest. Nevertheless, the influence of the situation on the world’s emerging markets and the overall global economy remains debatable and dependent on various scenarios of events unfolding in the future. The US launched a strike on Baghdad’s airport on January 3 killing Iran’s Quds Force Commander Qasem Soleimani.
Early on January 8, it was reported that Tehran retaliated by launching a missile barrage on US facilities in Iraq. The escalation of the US-Iran conflict pushed the price of oil up (due to potential US strikes on Iranian oil facilities), as well as the price of gold (due to mounting geopolitical risks). Experts interviewed by TASS believe that oil prices may soar above $70 per barrel, which in its turn may become the reason for the Russian currency to strengthen.
What experts are predicting for the Russian market
BCS Premier Senior Analyst Sergey Suverov thinks that a spike in the oil price is likely to bolster the Russian ruble. However, any further intensification of the conflict could drive investors away from risky assets.
"The influence on the ruble’s exchange rate is contradictory. On the one hand, the dollar as the main global currency rises amid geopolitical uncertainty, but on the other hand, a spike in the oil price fuels the ruble’s strengthening. The conflict’s development and its escalation jeopardize stock markets and is fraught with investors withdrawing from risky assets, particularly from emerging markets," he explained.
The escalating Mideast tensions may put pressure on the oil supply, sending commodities prices higher and bolstering the ruble’s exchange rate in the short term, Vasilisa Baranova, an analyst with the ACRA analytical credit rating agency, suggests. However, that effect is likely to be moderate due to regular Forex purchases by the Russian Finance Ministry, which reduce the dependency of the ruble’s exchange rate on oil price fluctuations, she noted. Baranova also pointed out that the shift by investors to higher-quality assets while a simultaneous decline in demand for the riskier assets of developing markets, including the ruble, will weaken it. In its base-case scenario,
ACRA expects the average annual exchange rate of the ruble at around 66-67 rubles per dollar in 2020. Finam’s Sergei Drozdov suggests that the ruble will hardly respond to the oil price hike or the Middle East conflict, whereas Russian stocks will continue hitting all-time highs, regarding both the MOEX and RTS indices. "Such surges will not affect the Russian economy overall. Oil (price) hikes will be positive for Russia’s budget, though they will be quick and minor," he explained.
The investment guru assumes that it is difficult so far to predict in which direction the ruble’s exchange rate will move against the dollar. However, the (ruble’s) exchange rate may rise to 63-64 rubles should adverse developments on stock markets emerge, Drozdov said, adding though that he does not rule out that the Russian currency will strengthen further to 60-61 rubles due to the current consolidation.
US-Iran strife and its effect on the global economy
"The conflict is unlikely to have any influence on the global economy. At this stage, the incident looks local, and unlikely to unfold adversely in the future. Even Western experts say that it will most likely shift to the diplomatic level. Moreover, 2020 marks the [onset] of the American presidential race, so US President Donald Trump is unlikely to rush into a war with Iran, the risks are far too great," Drozdov stressed. On the other hand, the deterioration of US relations with Iran is still unsurprising, he added.
"The US president needed to distract attention from the impeachment [process]. America has always traditionally dodged domestic problems by creating trouble spots somewhere globally: most recently in the Middle East. Previously, it happened during the 2008 crisis as the US escalated friction with Iraq and Libya to divert attention from its economy," he noted. The expert added that in case of any further escalation, the oil price might breach the $71 per barrel mark, "which will be gradually neutralized similar to the situation with the drones attacking the infrastructure of Saudi Arabia (in September 2019 - TASS)."
Meanwhile, Sergey Suverov from BCS expects the possibility of an oil price hike above $70 per barrel would trigger global inflation and bring the world economy closer to recession, thereby boosting stagflation risks in the US. Senior Manager at the NCR Rating Agency Alexander Proklov shares the view that the key question today is how far the US-Iran conflict will go and how long it will last. Nevertheless, the expert does not expect the short-term crisis in the Middle East to have a major effect on the global economy.
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