The ruble is collapsing. Russia’s currency fell to a new record low of 73 rubles to the dollar on Tuesday after opening 8% stronger following Russia’s central bank raised rates by 650 basis points to 17% at 1am.
In a worrying sign for the Bank of Russia, the currency remains volatile quickly reversing the morning’s gains and snapping back to move over 12% weaker from its opening price at the time of writing.
To compound the country’s woes Russia’s 10-year local bond yield (the interest rate the government has to pay to borrow) jumped over 2% to 15.36% while its dollar-denominated 10-year bond yield also leapt up 36 basis points to 7.55%, the Financial Times reports. Heinz Rüttimann, emerging market strategist at Julius Baer, is describing the situation as a “perfect storm” for Russia, the final step of which would be the introduction of capital controls.
Signs of stress in the political establishment were laid bare after Monday’s crash. Former finance minister Alexei Kudrin pointed the finger at state-owned oil firm Rosneft for spooking currency markets on Twitter after the company received what was widely seen as
back-door refinancing by the Russian central bank. And Rosneft hit straight back blaming the central bank for “pushing Russia towards recession“.
Russia’s business daily Vedomosti is citing panicked traders asking why the central bank is not intervening directly in currency markets to halt the latest slides. The central bank has spent over $US70 billion in 2014 protecting the ruble but last month it announced that it would halt unlimited interventions in an attempt to allow the currency to free float.
However, central bank head Elvira Nabiullina has reserved the right to intervene where currency falls threaten the financial stability of the country. For many, that time has lost since passed after Monday’s 10% ruble plunge. Vedomosti quotes the head of Russian trading firm Metallinvestbank Sergey Romanchuk as saying:
“The fact that the Central Bank does not intervene is a mistake, and one which greatly worsens the situation.”
Falls in the value of the ruble had been driven by the collapse in crude oil prices since June. Oil revenues account for around 10% of Russian GDP and almost 50% of government revenues. The falling ruble helped to soften the impact of the oil price drops, down 40% in dollar terms since June, as what revenue lost in the dollar price was made up with the rising amount of rubles each dollar would buy.
However, that link appeared to break on Monday with the ruble falling much more sharply than oil prices. As the chart below shows, while the two had been tracking each other the ruble plunged against the dollar (orange line) on Monday while Brent crude (green line) saw much less severe falls.
The disconnect has stoked fears that the situation is becoming a self-fulfilling currency crisis as the falling ruble casts doubt over the health of Russia’s private sector, in turn driving down the currency further. Russian companies are set to make some $US35 billion in foreign-currency loan repayments this months and over $US100 billion in 2015.
The central bank’s shock rate hike at 1am on Tuesday morning was aimed at halting the currencies slide. Although it has had the desired effect so far, news that Brent Crude is down nearly 2%, pushing the price below $US60 per barrel for the first time since mid-2009, will raise concerns that the hikes will not be enough to reverse the ruble’s fortunes.
This would be a double blow, as the rate hike itself threatens to push a weakened Russian economy into a recession, as the cost of capital has been sharply increased meaning that there should be less borrowing and spending.
Moreover, despite falls of over 45% this year analysts at Societe Generale warn that Russia still doesn’t look cheap in real terms relative to its peers. As Kit Juckes, global head of currency strategy, points out in his latest note:
“It’s still not cheap unless we believe that the gains in the last 16 years are all justified by productivity — an argument that works for some EM economies rather more than it does for Russia.”
That’s bad news for those looking for an imminent correction in the currency, and could suggest that there’s even further to go before investors are likely to be lured back in.
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