Ruble Battered as Irish Crisis, Oil Slump Spur Bearish Bets: Russia Credit

Traders are increasing payments to limit ruble losses faster than any other European emerging- market currency as the Irish debt crisis and China’s vows to cut inflation cause a slump in oil, Russia’s biggest export earner.

Options traders are paying more than double the rate at the end of October for the right to sell the ruble rather than buy it, with the one-week risk-reversal rate against the dollar -- the premium of put options over calls -- climbing to 1.25 percent from 0.5 percent on Oct. 29. The increase is the biggest among Europe’s emerging-market currencies and topped the 0.5 percentage point rise in the rate for Brazil’s real and a decline of 0.2 percentage point for China’s yuan.

Russia, which depends on oil and gas for 25 percent of economic output, is losing investor support as fuel prices slump to a four-week low on speculation higher Chinese borrowing costs will erode demand and as Ireland’s fiscal woes drive a selloff in riskier assets. VTB Group, the second-largest Russian bank, cut its economic growth forecast yesterday, citing lower oil prices. The ruble slid to its weakest level in five months against the dollar, the worst performer among the 25 developing- nation currencies tracked by Bloomberg.

“Depreciation pressures on the ruble have intensified,” Alexander Morozov, chief Russia economist at HSBC Holdings Plc, said in a phone interview in Moscow yesterday. “With lower oil prices and higher global volatility, the ruble will naturally weaken.”

Russia’s currency slid as much as 1.2 percent yesterday, its biggest drop in more than a month, and ended the day 0.9 percent lower at 31.37 per dollar, the weakest closing price since June 11. It is rebounding today, adding 0.6 percent to 31.1856 per dollar by 11:51 a.m. in Moscow. Non-deliverable forwards, or NDFs, which provide a guide to currency movements and allow companies to hedge, yesterday showed the ruble at 31.4346 per dollar in three months, after also hitting a five- month low yesterday.

Dollar Demand

Investors are seeking refuge in the safety of the dollar as Ireland moves toward a possible European Union bailout that Barclays Capital has estimated may cost about 80 billion euros ($108 billion). The Irish government agreed yesterday to a review of the finances of its debt-laden banks.

The average yield on dollar-denominated Russian corporate bonds jumped 7 basis points today to 5.78 percent, the highest since Sept. 23, as investors shunned emerging market assets.

Market volatility is “characteristic” of the post-credit crisis world, Deputy Finance Minister Dmitry Pankin said in a phone interview in Moscow yesterday.

Fleeing Risk

“There are periods when it seems there is a mass of money that’s just looking for a home and then a moment comes, whether it’s Portugal, Dubai, now Ireland, that spurs outbursts and nervousness on the market,” Pankin said. “Positions are being closed, investors are fleeing to risk-free assets and are no longer able to soberly measure the risk level of any given country.”

Crude lost as much as 2.8 percent in New York trading yesterday after Chinese Premier Wen Jiabao said the government of the world’s fastest growing economy is drafting measures to counter inflation, which at 4.4 percent last month is the fastest in two years. Energy accounts for about 75 percent of Russian exports to the Baltics and countries outside the former Soviet Union, government data show. Urals crude, Russia’s chief export blend, declined 0.2 percent to $84.73 a barrel yesterday.

The ruble would have weakened further had the central bank not intervened in the market to stem the drop, HSBC’s Morozov said. Bank Rossii, which has managed the ruble against a basket of dollars and euros since February 2005, is selling about $300 million of foreign currency a day to limit the ruble’s decline, Morozov said. The Moscow-based regulator doesn’t comment on its day-to-day actions in the currency markets.

Currency Basket

Russia’s currency snapped a four-day decline against the basket today, adding 0.2 percent to 36.2365 in Moscow. The basket is made up of about 55 percent dollars and 45 percent euros and is used to limit swings in the currency that disadvantage Russian exporters. The ruble weakened 0.2 percent to 42.4175 per euro today, a one-week low.

Russia’s federal ruble bonds, or OFZs, have declined, with the yield on notes due 2016 jumping 20 basis points in November to 7.37 percent. Government dollar bonds due 2020 have also dropped this month, sending the yield 19 basis points higher to 4.70 percent since Oct. 29.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 1 basis point to 146 today, down 71 from this year’s peak of 217, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a debtor fail to adhere to its agreements.

Depreciation Pressure

Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment grade, cost 13 basis points more than contracts for Turkey, which is ranked four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20. Brazil stood at 109 yesterday and China at 62.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries was unchanged at 209 basis points today, according to JPMorgan’s EMBI+ indexes. The difference compares with 146 for debt of similarly rated Mexico and 176 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

Concern Russia’s economic recovery after the global financial crisis may falter is spurring foreign investors and local companies to switch from rubles and invest their money outside the country, stoking depreciation pressures, said Aurelija Augulyte, a Russia economist at Nordea Bank AB, the Nordic region’s biggest lender.

OAO Sberbank, Russia’s largest bank, said Nov. 16 it will seek a $2 billion loan to help meet client demand for U.S. currency.

Slowing Growth

Russia’s economy expanded at its slowest pace this year in the third quarter at 2.7 percent as the worst drought in 50 years cut agricultural output and reduced consumer demand, according to government data published Nov. 12. China grew three times faster at 9.6 percent in the three months to Sept. 30.

Russia, the world’s largest energy exporter, is also being outpaced by the other so-called BRIC economies, with Brazilian and Indian GDP growing 8.8 percent in the second quarter, compared with 5.2 percent for Russia.

“Russia’s clearly not the strongest link in the emerging- market basket right now,” Nordea’s Augulyte said by phone from Copenhagen yesterday. “The overall picture of Russia in investors’ eyes is just not that attractive.”

Capital Outflows

Net capital outflows from Russia will reach $22 billion this year, the central bank said in monetary policy guidelines published Nov. 16, more than doubling its previous forecast of $8.7 billion. Russian bond funds took in $166 million so far this month, half the $326 million invested in Brazilian debt funds, according to Cameron Brandt, an analyst at EPFR Global, a Boston-based research firm.

Russian companies and the government have a total $17.1 million of foreign-currency denominated debt coming due in December, the most since at least July, according to central bank data. Repayments and the resulting demand for dollars will further depress the ruble until the end of the year, said HSBC’s Morozov, who forecasts the currency will weaken 6 percent to 33.40 per dollar by the end of 2011.

VTB Capital, the investment banking arm of VTB Group, cut its forecast for economic growth to 4 percent from an earlier estimate of 4.3 percent, according to its note e-mailed yesterday. It also lowered its ruble forecast to around 30 per dollar by year-end from a previous estimate of 29.30 per dollar, as oil trades at an average $85 a barrel, from previous forecasts of $92, the note said.

“All this noise about the euro area debt crisis and risk coming off is not going to just die away,” Ivan Tchakarov, chief economist for Russia and the former Soviet Union at BofA Merrill Lynch Global Research in Moscow said by phone from London yesterday. “December is going to be a challenging month for the ruble.”

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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