The Russian Currency Crisis Just Got Even Worse

USDRUBBloombergDollar/Rouble vs Brent crude oil price.

The Russian rouble has fallen over 3% against the dollar in early trading, shrugging off the central bank’s attempt to halt the slide by raising interest rates.

The country’s central bank increased interest rates by 1% on Thursday to 10.5% in an effort to slow the pace of rouble falls. However, the currency has continued to track the oil price downwards as WTI crude dropped below $US60 a barrel, down from $US107 a barrel in June, and Brent slid to $US63.12 on Friday.

At the time of writing $US1 would buy you over 57 roubles, a new record level.

While the country still has around $US416 billion in reserves and low government debt equal to only 9.2% of GDP, concerns have been focused on Russia’s corporate sector. In particular a number of Russian businesses borrowed heavily in dollars over the past few years, and repaying those loans is quickly becoming a much more expensive prospect.

This chart from Wells Fargo shows Russia’s external debt by sector (as in, who is holding that dollar debt):

Russian corporates are scheduled to pay around $US35 billion on this debt in December and over $US100 billion in 2015. These firms, and especially Russia’s banks, face major challenges funding this bill with Western sanctions freezing them out of global capital markets on the one hand and a weakening domestic economy putting pressure on profits on the other.

This problem is being compounded by concerns that the country’s financial sector may be running low on collateral that banks can use to access dollar reserves at the central bank. Usually it is the job of the central bank to provide emergency funding for a country’s financial institutions. In Russia this is typically done through what are known as “currency repo auctions,” in which banks offer collateral (like high-quality bonds) in exchange for access to currency, especially dollars, that they need to meet foreign-currency obligations.

Last week the Russian central bank cut the foreign exchange repo rate, the interest rate it charges on the currency it gives to banks. The rate fell from 1.5% above the London Interbank Offered Rate (Libor) — the benchmark interest rate at which banks lend to one another — to 0.5% above Libor. A lower interest rate should make it less expensive for banks to borrow from the central bank and therefore more appealing.

The rate cut illustrates that the central bank is growing concerned about the ability of Russian banks to meet their debt repayments. Underlining the point, in her statement following the interest rate hike on Thursday Elvira Nabiullina, head of the Russian central bank, announced that “the Bank of Russia plans to consider the introduction of foreign currency lending on the security of non-marketable assets”.

That suggests the central bank is considering expanding the types of assets that it will accept as collateral, by which it likely means accepting lower quality, less easily traded loans or financial securities. In other words, the state is having to take on more risk as the private sector struggles.

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