The rouble is caught in a tug-of-war today falling 3% in early trading before recovering its losses later in the day. At the time of writing it is struggling to hold onto its gains against the dollar.
Over the last few months Russia’s currency has been grinding downwards against both the dollar and the euro as oil prices fell and the country’s economy weakened on the back of international sanctions over the Ukraine crisis. This week, however, the rouble moved from worrying to critical falling 11%, its biggest weekly loss since the aftermath of the country’s 1998 default.
Dr Nicholas Spiro, managing director of Spiro Sovereign Strategy, writes in a note:
“Russia has a full-blown currency crisis on its hands. This is an all too familiar test of wills between a central bank that’s perceived to have lost credibility and increasingly bearish investors who have been scenting blood for some time now. Everything that Russia’s central bank has done up until now – stepping up the pace of its interventions and hiking interest rates aggressively – has patently failed to stabilise the rouble.”
The Russian central bank appeared to effectively throw in the towel by announcing the “abandonment of unlimited foreign exchange interventions” on Wednesday. This took away a key support for the currency and appeared to send it into free fall.
However, the central bank’s attempt to allow the rouble to free float is understandable considering the country’s international reserves fell by $US26 billion through October. Most of this was spent buying up roubles in an unsuccessful effort to halt the currency’s slide.
Rumours were swirling that the bank had reentered the fray in order to prevent a deeper rouble collapse that could have threatened financial stability in the country. This could explain the apparently lack of direction in the USDRUB market, if the central bank is attempting to wrest control back from currency traders.
Below is the latest statement from the central bank:
“In recent months, the dynamics of the ruble exchange rate and its impact on the financial and real sectors of the economy is causing concern. The observed weakening of the ruble caused by a number of fundamental factors, primarily, lower oil prices and limited access to external capital markets. In order to limit the rate of depreciation of the ruble only during October the Bank of Russia intervened in the amount of $US30 billion…In recent days, there are signs of excessive demand, which creates conditions for the formation of risks to financial stability. In these circumstances, the Bank of Russia is ready to increase foreign exchange intervention at any moment, and to use other financial market instruments at its disposal.“
If it fails, however, the risks are large. Next month Russian corporates will have to pay back $US35 billion of foreign currency-denominated debt, a large chunk of the $US140 billion due for repayment over the next 12 months. In January the December payment would have cost them 1.15 trillion roubles to settle. At current levels the same bill would be 1.63 trillion — or almost 500 billion roubles more.
According to Bank of America Merrill Lynch of the 17 largest foreign-currency bond issuers in its Russian corporate bond index only nine had enough cash to cover at least 80% of the outstanding debt. Of them only 7 have enough cash to cover the full amount.
We already know that Rosneft requested 2 trillion roubles f
rom the state National Wealth Fund to help it weather current market turmoil. The request was refused with Russia’s Finance Minister Anton Siluanov saying the scale of the request was impossible to meet without putting huge strain on the country’s reserves.
Whether more companies will now come out of the woodwork to request support is an open question.
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