Nine months after Russian President Vladimir Putin appointed Elvira Nabiullina to the top spot at the central bank, he’s making her job almost impossible.
Putin’s incursion into Ukraine and push to annex its Crimea region, whose residents backed joining Russia in a disputed referendum yesterday, have turned the ruble into the world’s worst-performing major currency. VTB Capital said the rout can’t be stemmed by further interest-rate increases.
“The ruble is absolutely insensitive to rates right now,” Vladimir Kolychev, VTB Capital’s chief economist for Russia, said by phone from Moscow March 14. “The main demand for hard currency is coming from the population and from companies as they try to protect their savings in a negative scenario. Raising rates is unlikely to stop this.”
As the threat of Western sanctions hangs over Putin, Russian asset prices are falling even after Nabiullina said on March 14 that policy makers didn’t foresee cutting interest rates in the coming months, after a surprise 150 basis-point increase March 3. The yield on benchmark ruble-denominated government bonds surged 135 basis points this month to a record, as Goldman Sachs Group Inc. said capital outflows from Russia jumped 60 percent to almost $45 billion this year.
Bank Rossii spent $2.7 billion on interventions to shore up the ruble March 12, its biggest market activity since selling $11.3 billion March 3, when the ruble slumped 2 percent, according to central bank data. Figures for March 13, with a settlement date one day later, will be published today.
The ruble weakened 0.3 percent to 36.6920 against the dollar today, headed for a record low and extending its selloff since Feb. 24 to 3.3 percent, the most among 31 major currencies tracked by Bloomberg. The yield on Russia’s bond due February 2027 rose 30 basis points, or 0.30 percentage point, to 9.71 percent March 14. The yield was 16 basis points lower at 9.55 percent as of 12:42 p.m. in Moscow today.
More than 95 percent of voters in Crimea backed leaving Ukraine to join Russia in the plebiscite, preliminary results showed. The referendum, endorsed as legal by Russia, has been disputed by the European Union and the U.S., who see the ballot as part of Putin’s attack on Ukraine’s territorial integrity.
EU foreign ministers meet in Brussels today to discuss levies on Russia, while U.S. senators decried the Crimea vote as a sham, urging sanctions and military aid for Ukraine as it seeks to retain the Black Sea peninsula.
Investors are waiting to see what sort of sanctions the West will impose and Russia’s response, according to Vladimir Osakovskiy, chief economist for Russia and the Commonwealth of Independent States at Bank of America Corp. in Moscow.
“That could generate headwinds for the markets and add more uncertainty,” he said by phone yesterday. “This is an unprecedented escalation.”
Economic links between the EU and Russia, which supplies a quarter of the natural gas consumed by European nations, may weaken sanctions, said Mansur Mammadov, a Moscow-based money manager at Kazimir Partners, which oversees $300 million in emerging-market equities.
“There is not much they can do at the moment, I mean, Russia is not Iran,” Mammadov said by phone yesterday. The country’s oil and gas revenues will continue to flow, he said.
Moscow-based Goldman Sachs economists Clemens Grafe and Andrew Matheny cut their forecast for Russian economic growth this year to 1 percent from 3 percent, writing in a report March 13 that “political tensions” were harming confidence and investment outlays, while stoking capital outflows.
Russia’s central bank said March 14 that borrowing costs will not be reduced from 7 percent over the next few months after what it called a temporary rate increase two weeks ago.
The central bank’s “priority is to contain the effect of exchange-rate dynamics on inflation and to maintain financial stability,” it said in the statement. “The Bank of Russia does not intend to lower the key rate in the coming months.”
The extra yield on Russia’s dollar debt over Treasuries fell five basis points to 345 basis points, indexes compiled by JPMorgan Chase & Co. show. There is a 68 percent chance that the ruble will weaken 0.8 percent to 37 per dollar by the end of 2014, according to options data compiled by Bloomberg.
“If we get some clear statement on Monday on sanctions, you can see it is going to be a very negative event for the currency,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by phone yesterday. “Emerging markets will be under pressure.”
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