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Ruble Volatility Signals Push Toward Free Float: Russia Credit

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Ruble Volatility Signals Push Toward Free Float
Ruble-dollar volatility climbed to 8.7 percent on Sept. 17, the highest level since June 24, from a one-month low of 6.2 percent on Sept. 10. Photographer: Anna Artemeva/Bloomberg

Sept. 22 (Bloomberg) -- Russia’s ruble is posting the widest swings in three months as the economic rebound from last year’s record contraction spurs the central bank to move closer to letting the currency float.

Ruble-dollar volatility climbed to 8.7 percent on Sept. 17, the highest level since June 24, from a one-month low of 6.2 percent on Sept. 10, according to one-month historical data compiled by Bloomberg. Expected fluctuations reached the highest since Aug. 12 last week, based on a measure derived from one-month dollar-ruble options known as implied volatility. The ruble has weakened 2.4 percent since the beginning of August, after strengthening 1.9 percent during June and July.

Bank Rossii, which has bought and sold currencies to curb volatility and protect exporters since the government’s default and devaluation in 1998, will “gradually change” its target trading band to make the exchange rate more flexible, according to new policies published last week. Russia’s swings contrast with Brazil where one-month real volatility was 7.55 percent on Sept. 16 and South Africa where it fell to as low as 7.13 percent in August, from 21 percent in June.

“The central bank is not immediately stepping out and providing the dollars the market is seeking,” Clemens Grafe, chief economist in Moscow at UBS AG, said in a phone interview yesterday. “They’re comfortable with more ruble volatility.”

Bank Rossii bought less foreign currency in July and August combined than in any month since December, with net purchases totaling $1.7 billion, according to central bank data. Policy makers sold a “negligible” amount in September, said Grafe, citing his bank’s traders.

Staying Out

The central bank stayed out of the market last week, according to Grafe. The ruble slid as much as 1.4 percent on Sept. 16, its biggest intraday drop since June 7.

Policy makers are more concerned about limiting appreciation in the ruble than depreciation, said Evgeny Gavrilenkov, chief economist at Troika Dialog, Russia’s oldest investment bank. The central bank didn’t step in to influence the currency in the past week “in line with their commitments,” he said.

Policy makers sold as much as $200 million yesterday for the third trading day, said Denis Korshilov, head of foreign-exchange trading in Moscow at Citigroup Inc.


“The central bank is still satisfied with its interventions mechanism,” Korshilov said in a phone interview yesterday. “They’re still committed to intervening according to the scale which they’ve indicated.”

Bank Rossii’s only change is in selling foreign currency to stem a weakening ruble now rather than buying to limit gains as in previous months, Korshilov said.

First Deputy Chairman Alexei Ulyukayev said in June the central bank would no longer target a specific exchange rate and the ruble may become more volatile.

Bank Rossii is steering the ruble within a trading corridor of 33.60 to 36.40 against a dollar-euro basket and taking oil prices into consideration when deciding how and when to influence the exchange rate, Ulyukayev said June 29.

Ulyukayev may answer questions on the bank’s ruble policy at a press conference in Moscow tomorrow, Bank Rossii’s press service said in an e-mailed response to questions yesterday.

Economic Rebound

The world’s biggest energy exporting economy may grow 4.4 percent this year, Prime Minister Vladimir Putin said Sept. 17, more than the official forecast of 4 percent. Capital investment in Russia rose the most in two years last month and disposable income climbed 7.9 percent, the most in seven months, according to government data.

“There are no big pressures for the ruble out there so in this kind of environment allowing a flexible exchange rate is not going to establish any firm trend either way,” said Vladimir Osakovsky, chief Russia economist in Moscow at UniCredit SpA, Italy’s largest bank, in a phone interview yesterday. “They’re only intervening to smooth out sharp moves, not intervention for intervention’s sake.”

The ruble was little changed at 31.0300 per dollar by the 5 p.m. close of trading in Moscow, after weakening 0.2 percent last week. The currency lost 0.9 percent to 35.7460 against the euro-dollar basket as it slumped 1.9 percent to 41.5100 per euro, a seven and a half-month low. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest rate differentials, showed the ruble at 31.2188 in three months.

Default Swaps

Gains in Russia’s dollar bonds due in 2020 lowered the yield 3 basis points, or 0.03 percentage point, to 4.603 percent. The yield on the country’s ruble notes due November 2014 fell 1 basis point to 6.87 percent.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps was unchanged at 162.5 basis points today, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment grade, cost 0.5 basis point more than similar contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries dropped 1 basis point to 232, according to JPMorgan Chase & Co. EMBI+ indexes. The difference compares with 167 for debt of similarly rated Mexico and 214 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

Yield Spread

The yield spread on Russian bonds is 60 basis points above the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.

Ruble volatility has doubled from an average of 4.4 percent in 2007 when Bank Rossii kept the exchange rate between 29 and 30 against the basket it uses to limit ruble fluctuations. The rate rose to an average of 13 percent in 2008 and 2009 when the central bank was forced to devalue the exchange rate by more than 20 percent during the global credit crisis and reached 17.7 percent on June 1 after the ruble weakened 5.8 percent against the dollar in May.

Russia’s biggest companies say they’re able to manage the risk of losses from currency swings.

While volatility affects the business of Moscow-based OAO Gazprom, Russia’s largest company has “always been able to deal with it successfully,” Yana Kolosovskaya, head of loans and guarantees, said at a conference in London yesterday.

OAO Lukoil, Russia’s second-largest oil producer, gets revenue from 37 countries, Sergey Nekrasov, Moscow-based Lukoil’s head of financial institutions and capital markets, said at the same conference yesterday. “What happens with the ruble does have an impact but the risk is managed.”

To contact the reporter on this story: Emma O’Brien in Moscow at

To contact the editor responsible for this story: Gavin Serkin at

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