By Avantika Chilkoti

U.S. sanctions have driven the price of oil and the ruble apart -- leaving Russia with expensive crude and a cheaper currency, a combination that is helping its economy.

The price of oil, Russia's main export, has risen almost 14% since mid-August. This is largely because of the coming resumption of U.S. sanctions against Iran, choking off the supply of crude from that country.

Meanwhile, the ruble has declined 15% since April, when Washington imposed sanctions on Russia for alleged meddling in U.S. elections and other aggressions.

So, just as the price of dollar-denominated oil rises, those greenbacks are worth more when translated back into a weaker ruble.

In recent days, oil and the ruble have changed directions again, with both crude and the dollar declining. But for months, the Russian economy benefited as a rising oil price and a falling ruble refilled government coffers and sent profit soaring at the country's giant energy groups. This year, shares of oil producers Rosneft Oil Co. and Lukoil Oil Co. are up 56% and 39%, respectively, handily outperforming Western peers.

"Russia is much better off with higher oil and a weaker ruble because, from a budgetary perspective, that's a double positive," said Viktor Szabo, emerging-markets debt-portfolio manager at Aberdeen Standard Investments.

Emerging markets generally have been hit by the rising U.S. dollar and interest rates, trade worries and domestic political concerns in individual countries such as Turkey. The ruble has the added weight of U.S. sanctions.

In August, the ruble fell further after the U.S. slapped further sanctions on Russia over an alleged nerve-agent attack in the U.K. and threatened to follow through with a second round of measures in 90 days' time if Russia doesn't meet a list of three criteria involving stopping the use of biological and chemical weapons.

The risk for the U.S. is that sanctions aren't having the intended effect, given how the combination of a weaker ruble and higher oil price is playing out.

At the end of last year, a barrel of oil brought in just over 3,835 rubles for Russian sellers, when translated back from the dollars it is sold in. Now, each barrel brings in 5,262 rubles, an increase of almost 40%.

Rosneft, the world's largest listed oil producer, is one of those reaping the benefit. It reported a near-50% increase in earnings before interest, tax, depreciation and amortization in the second quarter, compared with the previous three months.

The sanctions are also helping the country lower its foreign debt at a time it had started to rise for the government and companies, according to Société Générale. That is occurring both as the fall in the ruble deters issuers from taking on dollar-denominated debt and amid concern the U.S. will impose sanctions on trading in Russia's dollar debt.

Russian private and government debt held by foreign investors has been falling since 2016, reaching 32% of gross domestic product in the first quarter, according to Société Générale. Meanwhile, Russia's current-account surplus, a measure of its transactions with the rest of the world, has climbed to $18.3 billion in March, up from $14.6 billion in the previous quarter.

"Russia has adapted to low oil prices and sanctions impressively," analysts at CreditSights said in a note to clients. "Sovereign debt remains reasonably low, and the stock of external liabilities is now significantly lower."

To be sure, years of sanctions have hurt the Russian economy. A spate of Western penalties against Russia since Vladimir Putin's decision to annex Crimea in 2014 have wiped out half the ruble's value and reduced investment in the energy sector.

Russian markets have also suffered more recently. Since the start of this year, the yield on a U.S. dollar-denominated government bond maturing in September 2012 has risen to 4.36% from 3.28%. Russia's Micex equity benchmark index has dropped 12% in the same period, despite the weaker ruble making exports more profitable.

The weak currency is also feeding through into inflation, which the central bank expects to rise to as much as 5.5% by the end of next year, well above its 4% target. In September, the Russian central bank surprised markets with a quarter-point increase to 7.5% as it sought to target inflation.

Write to Avantika Chilkoti at avantika.chilkoti at @wsj.com

(END) Dow Jones Newswires

October 16, 2018 05:44 ET (09:44 GMT)

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