Ruble Rally Turns to Rout as Fortunes Tied to Sinking Oil

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Russia's Central Bank Governor Elvira Nabiullina
Elvira Nabiullina, Chairman of Russia's central bank, set the ruble free months ahead of target after spending $90 billion of the central bank’s gold and foreign-currency reserves this year to manage the currency’s slide. Photographer: Andrey Rudakov/Bloomberg

In just a week, Russia’s ruble went from posting one of emerging market’s best rallies to the worst selloff.

The ruble’s 9.3 percent slump last week to 50.4085 per dollar, the worst drop among 24 emerging markets tracked by Bloomberg, followed its biggest weekly gain in more than two years. Options trading shows greater than 50 percent odds the currency will weaken another 10 percent by March 1. Russian bonds fell for a fourth month in five in November.

Central bank Governor Elvira Nabiullina’s decision last month to create a free-floating ruble rattled short-sellers, sparking a week-long surge. The change tied the currency’s fortunes to the price of oil, Russia’s main source of export revenue, which plunged last week after OPEC kept its output ceiling unchanged. The drop in crude is adding to headwinds for an economy on the brink of a recession because of sanctions.

“The outlook for ruble assets is pretty bleak because everything is against them,” Richard Segal, head of international credit strategy at Jefferies International Ltd., said by e-mail from London Nov. 28. Nabiullina’s “resolve to let the currency float will be tested and because this is a new policy, it will keep a lot of investors on edge,” he said.

Stability Risk

The ruble has weakened 37 percent against the dollar this year, the worst performer among 24 emerging-market currencies tracked by Bloomberg. It dropped 13 percent in November.

Nabiullina set the ruble free months ahead of target after spending $90 billion of the central bank’s gold and foreign-currency reserves this year to manage the currency’s slide. The Bank of Russia may still conduct “large-scale” interventions if it sees risks to financial stability, she told lawmakers in Moscow last week.

“A significant part” of the ruble speculators have abandoned the market and the current sell-off is “purely” a result of weaker oil, according to Vladimir Osakovskiy, chief economist for Russia and the Commonwealth of Independent States at Bank of America Corp. in Moscow, said by e-mail on Nov. 28. With crude at $70 a barrel, the currency would reach “equilibrium” at about 50-52 rubles per dollar, he said.

Slashing Reserves

The ruble fell to a record for a third day, trading 4.4 percent lower at 52.60 versus the dollar by 5:35 p.m. in Moscow. Government bonds handed investors a 15 percent loss last month in dollar terms, the worst performance among 31 emerging markets tracked in the Bloomberg Emerging Market Local Sovereign Index.

Moving to the free float “was the right thing to do,” according to Ivan Tchakarov, Citigroup Inc.’s Moscow-based economist. “One can’t go against the fundamentals -- if oil collapses from $115 in June to $70 in November, there isn’t too much that you can do,” Tchakarov said by e-mail.

Six years ago, Russian policy makers sold $200 billion in seven months, slashing reserves by almost 40 percent, to prop up the ruble as commodity prices tumbled after the bankruptcy of Lehman Brothers Holdings Inc. According to the median estimate of 23 economists polled by Bloomberg, the central bank will resume its discretionary currency interventions to prop up the currency if the ruble weakens to 50 per dollar.

Balancing Out

A weaker ruble benefits the budget because it boosts export revenue in local-currency terms, helping offset the slide in Brent. Russia relies on oil and gas for 50 percent of budget revenue.

Bank of Russia probably won’t intervene as the “ruble’s devaluation balances out the falling oil price,” Evgeny Shilenkov, the head of trading at Veles Capital LLC in Moscow, said by phone Nov. 28. “The currency market is more realistic after the free-float and reflects the actual oil price.”

Nabiullina is weighing policy options as she seeks to keep lending flowing in an economy on the brink of recession, while avoiding a deeper currency slump that could spark a rush among citizens to switch their ruble savings into dollars.

Russia faces a 70 percent chance of recession, a survey of economists from Oct. 30 showed. The economy of the world’s biggest energy exporter has been weakened by U.S. and European sanctions over President Vladimir Putin’s role in Ukraine, where pro-Russian rebels battle government troops.

“The pressure on the ruble is less about the conduct of Russian monetary policy and more about plunging oil prices,” Nicholas Spiro, head of Spiro Sovereign Strategy in London, said by e-mail Nov. 28.

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