Tags: russia | ruble | currency | economy

Ruble Sees Worst Annual Drop Since 1998 as Oil, Sanctions Weigh

Tuesday, 30 Dec 2014 08:19 AM

The ruble headed for its worst annual slide since its 1998 default as a slew of government interventions failed to support the currency.

Russia’s currency lost 42 percent this year, the most in the world after Ukraine’s hryvnia. Government bonds fell the most in emerging markets in 2014, with the five-year yield climbing 822 basis points to 15.44 percent. The Micex Index was set for the first decline in three years. The ruble rose 4 percent to 56.0820 a dollar by 5:34 p.m. in Moscow after dropping 7.4 percent Monday.

The ruble got hammered this year as crude oil, the nation’s biggest export, slumped into a bear market and sanctions over the Ukraine conflict pushed Russia’s economy toward recession and a probable downgrade of its credit rating to junk. The central bank responded with a trebling of its key interest rate as it burned through about $90 billion of reserves while the government ordered state-controlled exporters to sell foreign currency and announced a bank recapitalization plan.

“In general, the ruble keeps following the oil price,” Dmitry Savchenko, an analyst at Nordea Bank in Moscow, said by phone. “Volatility like this is likely to remain in the beginning of the next year, as a consequence of both the central bank letting the ruble float freely, and speculators reacting in a more emotional way to everything that’s taking place.”

Three-month implied volatility in the ruble reached a 16-year high of 59 percent on Dec. 23 after averaging 10 percent for the first nine months of the year. The Bank of Russia brought forward plans to allow the currency to trade freely in November as it sought to slow the drain on foreign-currency reserves at a five-year low of $399 billion.

Currency Directive

Tuesday’s move higher in the ruble was due to either state companies or the Finance Ministry buying rubles, according to Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. The ministry sold $920 million on Dec. 18 and 19, Bank of Russia data show.

In a directive last week, the government ordered OAO Gazprom and four other state-controlled exporters to cut foreign-currency holdings by March 1 to levels no higher than they were on Oct. 1, helping spur the ruble’s 8.4 percent weekly advance versus the dollar.

The central bank raised its key rate six times this year, to 17 percent from 5.5 percent, and eased access to euros and dollars as the ruble plunged to a record 80.10 on Dec. 16. Russian markets will close for an annual New Year’s break from Wednesday through Jan. 4 and for Christmas holidays on Jan. 7.

Stability Indicator

“It is important for the government to show a stronger closing on the last trading day of the year,” Miklashevsky said by e-mail. “The ruble rate has become again an important factor for internal stability and an indicator of the state of the economy for ordinary citizens in Russia.”

The Micex (INDEXCF) dropped 2.9 percent to 1,391.14, taking this year’s decline to 7.5 percent, while the dollar-denominated RTS Index slumped 46 percent. Russian ruble bonds lost 52 percent this year, the most among 30 emerging markets tracked by the Bloomberg Local Currency Sovereign Index.

The Russian economy may shrink as much as 4.7 percent next year if oil averages $60 a barrel under a “stress scenario,” the central bank said this month. Brent, the oil grade traders use to price Russia’s main export blend, slipped 0.2 percent to $57.79 a barrel today, extending its year-to-date slump to 48 percent.

Net capital outflows may reach $134 billion, more than double last year’s total and on par with 2008, central bank data show.

Biggest Selloff

Standard & Poor’s said Dec. 23 that it’s considering cutting the nation’s sovereign rating to junk for the first time in a decade. Moody’s Investors Service put 16 Russian banks on review for possible downgrade on the same day.

The Bank of Russia increased its key rate by 6.5 percentage points in the early hours of Dec. 16 after a 1 percentage point rise five days earlier failed to stem the ruble’s rout.

What followed was the biggest intraday selloff in the currency since at least 1993 as traders pushed the currency down as much as 20 percent to a record 80.10, before ending the day just 4.5 percent lower. The ruble has strengthened 19 percent since then.

The central bank’s job has been complicated by sanctions that cut Russian companies off from Western financial markets after President Vladimir Putin annexed Crimea and was alleged to provide support to separatists in eastern Ukraine.

That has made it harder for Russian banks to refinance foreign-currency debts and forced the government to step in. The Finance Ministry will invest 100 billion rubles from the National Wellbeing Fund in a subordinated deposit at OAO VTB Bank, according to a Dec. 27 prime ministerial decree.

Economic Levers

A law was signed by Putin last week allowing as much as 10 percent of the wellbeing fund to be used for recapitalizing banks.

Bank stress peaked on Dec. 18 when the MosPrime overnight rate, a gauge of interbank lending, reached a record 27.3 percent. It averaged 7.9 percent in the first nine months of the year and was at 18.25 percent Tuesday.

While Putin’s domestic popularity has grown during the ruble crisis, he has continued to put down dissent and tighten his grip on the economic levers of power this year.

Opposition leader Alexey Navalny was given a suspended sentence for fraud and money laundering today, charges for which his brother faces 3 1/2 years in prison. Oil producer OAO Bashneft was taken back under state control and the chairman of former owner AFK Sistema spent three months under house arrest.

“With the oil price at these levels, the ruble equilibrium price should be in the 55-60 per dollar range,” Nordea’s Savchenko said.

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The ruble dropped, extending its worst annual slide since 1998, as speculation that Russia intervened failed to support the currency on the final trading day of 2014.Russia's currency declined 0.6 percent to 58.6850 a dollar by 1:29 p.m. in Moscow, reversing an earlier gain...
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2014-19-30
Tuesday, 30 Dec 2014 08:19 AM
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