Ruble Drops to Month Low on Oil Slide as Russia Pulls Bond Sale

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The ruble slid to a month low as tumbling oil prices threaten to deepen the economic slump in the world’s biggest energy exporter. The government canceled a debt sale as yields on Russian bonds jumped for a second day.

The currency lost 4 percent to 65.79 per dollar by 8:01 p.m. in Moscow, the lowest since Dec. 17. The yield on five-year ruble-denominated bonds rose 96 basis points to 17.64 percent. The Finance Ministry said it won’t proceed with a bond sale tomorrow, after pulling more than 20 auctions last year as sanctions over Ukraine and oil’s plunge spurred borrowing costs.

The selloff in Russia’s currency has picked up where it left off in 2014 largely due to the further 20 percent slide in Brent crude, the oil grade traders use to price the country’s main export blend. While helping to offset the drop in government energy revenue, the ruble’s plunge is stoking inflation at a five-year high as the economy borders on a recession and Russia risks losing its investment-grade standing.

“The ruble could fall further at current oil prices,” Vladimir Bragin, the head of research at Alfa Capital in Moscow, said by phone. “The decline in oil is negative for the Russian economy. Investors are hoping for stabilization.”

Brent retreated as much as 4.7 percent to $45.19 a barrel today. Russian assets have come under renewed pressure this year as Fitch Ratings last week knocked the sovereign’s credit rating to one level above investment grade. Standard & Poor’s is rethinking its score for the sovereign, warning in December it may push the rating to junk as early as this quarter.

Limited Borrowing

This has worsened perceptions of Russia’s creditworthiness. The cost of protecting the government’s debt against default increased 125 basis points in January to 601 today, the highest in almost six years and making it the fifth riskiest credit globally, according to data compiled by Bloomberg.

“Investors believe that it has triggered a domino effect, and now it will be easier for both S&P and Moody’s to take similar actions, which will make another hit on the investment climate,” Andrey Dirgin, an analyst at Alfa-Forex in Moscow, says in e-mailed comments.

The five-year sovereign bond yield climbed 223 basis points in 2015, after surging 819 basis points last year. The higher costs are curtailing government plans to offer 150 billion rubles ($2.3 billion) of local-currency bonds known as OFZs by March 31, just over half of which would mature in five years or less, according to Finance Ministry figures.

The ministry cited “unfavorable market conditions” for pulling tomorrow’s sale.

ETF Outflows

Investors have also dumped Russian stocks this week, with the Market Vectors Russia exchange-traded fund registering $36.9 million outflows yesterday, the most since Dec. 15, according to data compiled by Bloomberg.

The dollar-denominated RTS index of equities slid 2.5 percent today, while the benchmark Micex Index gained 1.3 percent. Exporters including OAO Gazprom and OAO Lukoil benefit from the weaker ruble because they earn in dollars and euros and their costs are mostly in the local currency. Lukoil climbed 1.8 percent and Gazprom added 1.7 percent on the Micex.

Banks led declines on the 50-member gauge. OAO Sberbank and OAO VTB Bank, the nation’s largest lenders, lost 4.1 percent and 4.8 percent, respectively.

The “Russian banking system is at a greater risk since the falling ruble decreases the solvency of borrowers and reduces the number of potential borrowers,” Oleg Popov, a money manager at Allianz Investments in Moscow, said by e-mail. This “leads to the shrinking of the banking sector over all,” he said.

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