Ruble falls again despite central bank bazooka

By bne IntelliNews December 16, 2014

bne IntelliNews -


The ruble appreciated for less than an hour on December 16 after the central bank's overnight hike in interest rates and after touching 80 to the dollar, the ruble closed at 72.4, a drop of 12.75% during the course of the day.   

Cracks also appeared inside the Russian elite during the day, as a war of words broke out over who was to blame for the debacle, including accusations that giant state-owned oil company Rosneft - run by  Igor Sechin, a  close associate of President Vladimir Putin  - was responsible for the ruble's crash.

The head of the Central Bank of Russia (CBR) Elvira Nabiullina defended the bank's surprise overnight interest rate hike by 6.5 percentage points to 17%, which caused the ruble to bounce by 8% at market opening. But her subsequent comments backing a floating exchange rate undid the bounce by implying that there would be no central bank intervention to defend the ruble rate.

Coming after the worst daily drop of the ruble in 15 years, the interest rate hike stopped the ruble collapse for less than an hour: on opening of trading on December 16 the ruble jumped back to RUB58.15/dollar and RUB72.45/euro, but by noon it was trading at RUB67/dollar and RUB83.23/euro.

Nabiullina commented philosophically that that the floating exchange rate should protect the economy from external shocks. "When your currency drops 50%, the 50% drop becomes the shock!" commented analyst Tim Ash of Standard Bank.

The ruble dropped like a stone after noon, following Nabiullina's comments, which implied that the central bank was still unwilling to sacrifice its hard currency reserves to support the ruble.  The dollar reached RUB74.09 and the euro RUB92.

Some banks were reporting a fourfold increase in demand for hard currency, according to Bloomberg, as the population rushed to buy dollar cash.  "It has been converting savings into USD at an accelerated pace, with the bulk of these conversions occurring in the morning," Alfa Bank analysts said of the Russian population in a research note.

Putting more pressure on the ruble, the energy minister of the United Arab Emirates Suhail Al-Mazrouei was quoted as saying that OPEC oil output would remain unchanged even should oil drop to $40 per barrel. 

Further measures to support ruble and provide FX liquidity are not expected to do much more than the rate hike, as the CBR has pledged not to introduce currency controls. "In addition to rate hikes, the CBR should focus on providing large volumes of hard currency to banks and limit the provision of ruble liquidity in order to further support the ruble," UralSib analysts wrote.

In further comments to the press, Nabiullina justfied her decisions, arguing that the ruble is undervalued and is pressured by external factors: low prices and uncertainty in the oil market, as well as limited access to foreign capital markets for Russian borrowers.

She urged the economy to adapt to the new conditions of operating in the “ruble zone”: using ruble-denominated financing sources, promoting import substitution, and profiting from the opportunities coming with devaluation.

The accusations against Rosneft were broadcast in a tweet by government critic Aleksei Kudrin, who alleged that the oil company triggered the ruble meltdown by allegedly converting to dollars a massive RUB625bn bond raised from Russian state banks on December 11.

According to Kudrin and other government critics, Sechin desperately needed to raise dollars to pay down $6.9bn in credits by December 21, originally taken out to fund the purchase of oil major TNK-BP in March 2013. Rosneft also has to pay back another $7.3bn loan by February 13, 2015.

With Rosneft shut out from international capital markets because of sanctions imposed by the West over Ukraine, and Rosneft's dollar revenues halved due to the steep drop in the oil price, Rosneft was forced to raise funds in rubles and convert them, to avoid the company defaulting on the loans, critics said, thereby sending the ruble into free fall on a thinly traded market. 

Rosneft hit back, with spokesman Mikhail Leontev, an outspoken Russian nationalist, slamming the Russian central bank's ineffective decision to hike interest rates, saying that this would "shove Russia into recession," and was the equivalent of "putting a patient with a small cut on his finger out of his misery with a shot in the head". Sechin himself denied Rosneft had converted the ruble funds into dollars and blamed the accusations on "provocators".

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