World’s Best Carry Trade Fizzles as Ruble Slides With Oil Price

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Russia no longer needs to convince investors the world’s biggest currency rally is over. The drop in oil and looming foreign debt payments are making the case for it.

Borrowing in dollars to buy higher-yielding ruble securities earned an average 24 percent this year. For May, those returns have turned negative as the ruble heads for its first monthly decline since January.

Caution is returning as Brent crude near the lowest in six weeks damps the outlook for Russia’s oil-led economy to avoid a deepening recession while a projected doubling of foreign-currency debt payments in June from this month compels companies to sell rubles. Russian officials warned in April the ruble’s advance had gone too far and began selling the currency in May.

“Investors are more likely to sell the Russian currency and assets when Brent is trending down,” Tatiana Orlova, the chief Russia economist in Moscow for Royal Bank of Scotland Group Plc, which expects a 12 percent depreciation by the end of August, said by e-mail Thursday. “Those of them who in past months found it plausible that the situation in Russia could be on the mend will likely start questioning that now that Brent is falling again.”

Weakening Economy

Russia is headed for its first recession in six years as U.S. and European sanctions over the country’s role in Ukraine locked companies out of foreign debt markets and sent the currency tumbling 46 percent last year. Economic weakness showed few signs of letting up last month as wages shrank the most since 1999 while retail sales and industrial production posted their biggest declines since 2009, government data showed.

The ruble fell 1.2 percent to a five-week low of 52.6 against the dollar in Moscow on Thursday, leaving the currency down 1.8 percent in May. The currency strengthened 0.5 percent to 52.317 against the dollar by 6:42 p.m. on Friday. Brent crude has dropped 2.9 percent this month.

While a weak economy and lower oil prices damp foreign investor appetite for Russia’s carry trade, the Bank of Russia has lessened the attractiveness for banks to borrow foreign currency via its repurchase operations and then reinvest in higher-yielding assets. Since March, it’s curtailed the supply and boosted the cost of repos.

Following an 18 percent rally in the ruble in the first four months of the year, the central bank started a program of buying as much as $200 million a day. Foreign-exchange purchases totaled $1.98 billion from May 13 to May 26, data from the regulator show.

‘Ruble Dethroned’

“The ruble has been dethroned as the best carry trade this month due to central bank interventions,” Bernd Berg, an emerging-market strategist at Societe Generale SA in London, said by e-mail on May 27. “I expect the ruble to be very volatile over the month of June.”

The carry trade may revive and the currency could strengthen to 50 against the dollar should the Bank of Russia keep its key refinancing rate on hold at the June 15 meeting, Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said by e-mail on May 28.

Policy makers will probably cut the rate by at least 50 basis points in their fourth reduction this year as part of efforts to shore up the economy, according to all eight of the economists surveyed by Bloomberg.

The ruble faces headwinds from Russian companies paying foreign debts that will amount to $10.2 billion next month, from about $5 billion in May, according to central bank data.

“It looks like the rally in the ruble has come to an end,” Liza Ermolenko, an economist at London-based Capital Economics Ltd., said by e-mail on May 27. “The ruble will remain under pressure due to the political uncertainty, our forecast for oil prices to edge down and the bleak economic outlook.”

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