Russian Ruble Hits New Low Despite Rate Rise

Dec 19, 2014

 

The battered ruble plunged to a record low against the dollar again Tuesday, as investors grew convinced that the Russian central bank’s surprise move overnight to jack up interest rates to 17% wouldn’t be enough to alleviate the pressure on the currency from falling oil prices and western sanctions.

By early afternoon in Moscow, the ruble dropped sharply, reaching 80 to the dollar, a record low and a 15% decline from opening levels when it rallied briefly. At 4:30 p.m. local time, the dollar was trading around 73 rubles. However it regained some ground in the evening and narrowed its decline to 5.6% after Economy Minister Alexei Ulyukayev said the government will introduce some “regulatory measures” at the forex market, but said it is not discussing any capital-control measures.

His televised comments came after a meeting of the key financial and economic officials with Prime Minister Dmitry Medvedev . “The measures will be aimed at a better balance of demand and supply in the domestic currency market,” the minister said, adding the government will increase refinancing in foreign currency. Mr. Ulyukayev said the ruble is “undervalued” and “doesn’t correspond to current economic fundamentals,” but he declined to say at what level the ruble should trade.

He didn’t provide any details on what measures the government or the Central Bank may take to stop the decline.

“In a situation like this, an emerging market central bank has to ‘break the back’ of the market, by selling dollars on top of it,” said Luis Costa, emerging market analyst at Citigroup , in an internal note. “The central bank again shied away from aggressively selling dollars in a crucial moment to reaffirm its monetary and FX policies. This is essentially why the hikes didn’t work.” 

Traders said there was no indication yet that the central bank was intervening with sales of foreign currency, even as the dollar tested the record level of 80 rubles briefly. A further fall in crude oil prices on Tuesday also weighed on the ruble and Russian financial markets.

In an interview with state television aired midday, Central Bank Chairwoman Elvira Nabiullina said the market would need time to stabilize after the rate increase and dismissed proposals made by some in parliament that the government should impose capital controls.

Mr. Ulyukayev supported Mrs. Nabiullina and said the Central Bank’s rate rise, possibly overdue, was a right thing and “together with the measures we are proposing will bear results.”

Later, Deputy Chairman Sergei Shvetsov called the situation “critical,” the Interfax news agency reported. “At lot of [market] participants are in serious condition because of these events.”

The choice the central bank had “was between very bad and very, very bad,” he said, noting that the bank could yet take more measures to stabilize the market. Economists warned that the central bank appeared to be losing control of the market and might have no alternative but to restrict trading. “Capital controls as a policy measure cannot be off the table now,” said Citigroup’s Mr. Costa.

Some banks in Moscow and other cities reported a shortage of dollars and euros after clients scrambled to take out their savings, while others said the currencies were still available.

“Today was the first in a long time when our foreign counterparty said that it has foreign currency but can’t deliver it tomorrow, because all the planes are full,” said Tatiana Ryabina, head of interbank lending at midsize Moscow-based Lanta Bank.

Facing a spiraling currency crisis, Russia’s central bank held an emergency meeting and raised its key interest rate early Tuesday by 6.5 points to 17%, a move made all the more dramatic because the bank had just increased the rate by one percentage point last week. But investors saw the rate rise as insufficient to contain the deluge of selling pressure and the ruble’s plunge accelerated on Monday, with the dollar rising to nearly 67 rubles--a record high--in after-hours trading.

“The rate rise is OK, but it happened too late. If they had raised it by this amount last Thursday and had increased interventions, that would have calmed the market,” said Alexei Kulakov, chief derivative trader at Promsvyazbank.

Ms. Nabiullina’s comments did little to calm the market. She said the rate increase was aimed primarily at curbing rising inflation, rather than steadying the currency. She blamed the ruble’s weakness on low oil prices and western sanctions, which have sharply limited access to capital for Russian companies and banks. “We think the ruble is undervalued by all parameters—the condition of the economy and the balance of payments. But it will take time for it to come back toward the fundamental rate,” she said.

With the economy already heading for recession next year, the central bank had appeared hesitant in recent months to raise rates steeply for fear of further depressing growth. At the same time, the bank limited its sales of dollars on the currency market in an apparent effort to husband its $430 billion in reserves in case the political tensions and oil-price weakness last into next year and beyond. The official RIA-Novosti news agency on Tuesday quoted a Kremlin spokesman as declining to comment on the rate move.

“This was a move reflecting just how far the CBR had got behind the curve,” Standard Bank analyst Tim Ash wrote, referring to the rate increase. “In a situation where a central bank allows its currency to depreciate by 10% in a day, the message is that they have lost control, and their very credibility is at stake.” With the ruble giving up some of its early gains Tuesday, he wrote, “The CBR cannot allow this move to fail. They will now have to come back with a big, big FX intervention, or yet more rate hikes.”

 

Traders and analysts said the central bank likely would have to back up the huge rate increase with further moves to limit the availability of rubles, as well as significant sales of dollars.

“Russia is in the midst of a perfect storm,” said Julius Baer Emerging Market Strategist Heinz Rüttimann. “Western sanctions hurt, the oil price is down, interest rates high and the economy falling back into recession. It cannot get much worse for Russia. The final step for the perfect storm would be the introduction of capital controls.”

Oil prices were slipping early Tuesday. At a conference in Qatar, Russian Energy Minister Alexander Novak said Russia would maintain its present level of oil production next year, but Russian oil companies might reconsider some investment projects.

Other Russian markets were battered by the rate-rise news. “There is panic on the market. Bonds are being smashed. We have lots of foreign holders of Russian bonds. If they will have to ditch bonds due to stop losses, the money will flow to the currency market,” said Mr. Kulakov of Promsvyazbank.

Russia’s dollar-bond yields remain mostly higher, reflecting weaker prices. Debt maturing September 2023 is yielding 7.84%, about 0.07 percentage point more than Monday’s close, according to Tradeweb. Corporate bond yields are also still marked higher. Gazprom bonds due July 2022 are yielding 10.6%, about 1.2 percentage point up on Monday’s close.

Russian stock prices plunged, with the benchmark, dollar-denominated RTS index falling to levels last seen in the depths of the global financial crisis in 2009.

Source: The Wall Street Journal