Goldman Sees Russia Taming Ruble Losses After PlungeVladimir Kuznetsov
Goldman Sachs Group Inc. predicts Russia will contain losses in the ruble as policy makers pledge to curb volatility after ratcheting up interest rates and selling billions of dollars in the currency market yesterday.
Bank Rossii, which ING Groep NV estimates sold as much as $12 billion yesterday, said it will start setting ruble intervention parameters daily, a move that will give the central bank more room to ease swings. Goldman Sachs analysts anticipated a change in tack, writing in a note to clients before the move that Bank Rossii may favor a policy that allows for “discretionary interventions” while predicting the ruble has limited “downside” after sinking to a record low.
Central bankers are stepping up efforts to shore up the ruble as investor demand for Russian assets plummets after President Vladimir Putin’s military forces took over parts of neighboring Ukraine. The ruble climbed after suffering the biggest decline in 29 months and the worst slump in the world yesterday. Bonds also advanced even as the Finance Ministry canceled a weekly debt auction following a surge in yields yesterday, when Bank Rossii raised rates 1.50 percentage points.
“We may see the ruble even lower, but at close to 38-39 per dollar, Bank Rossii may stop shifting the corridor and announce” a floor for the ruble, Oleg Kouzmin, an economist at Renaissance Capital Holdings Ltd in Moscow, said by phone yesterday. There has already been a “very significant devaluation” and “they have lots of reserves” to defend the ruble, he said.
The ruble strengthened 1.3 percent to 36.1202 against the dollar at 7:27 p.m. in Moscow, following a 1.7 percent weakening yesterday. The yield on benchmark bonds due February 2027 dropped 17 basis points, or 0.17 percentage point, to 8.71 percent, declining from the highest level since 2012.
The Micex stock index rose 5.3 percent after dropping 11 percent yesterday, the sharpest slump in more than five years.
“Augmenting the interest rate decision with a stronger commitment to reduce exchange-rate fluctuations driven by a political shock, in our view, is the right response,” Goldman’s Grafe and Matheny said in an e-mailed note today. “The step is strongly ruble positive.”
The rebound comes as Putin, in his first public remarks since Russian forces took control of the Crimean peninsula in southern Ukraine over the weekend, told reporters he saw no immediate need to invade his neighbor, while reserving the right to use force to protect ethnic Russians.
Bank Rossii sold between $10.5 billion and $12 billion to support the ruble yesterday, Dmitry Polevoy, chief economist at ING in Moscow, wrote in an e-mailed note. The central bank is scheduled to release data on the size of the sales tomorrow, in accordance with its policy to post figures with a two-day lag.
Russia’s foreign reserves have fallen $40 billion since May to $493 billion, according to data through Feb. 21. ING said the country’s “net” war chest, excluding its sovereign wealth fund, gold and International Monetary Fund reserves, is about $270 billion. Allowing for funds to cover three months of imports, it shrinks to $150 billion, he said.
The central bank allows the ruble to float within a flexible corridor against its target dollar-euro basket. Bank Rossii said it will set the amount of market interventions it takes to shift the trading band on a daily basis, giving officials more flexibility in determining how many dollars it sells at a given price level before weakening the ruble’s trading band.
Yesterday, policy makers set the threshold at $1.5 billion, up from $350 million previously, according to the statement on Bank Rossii’s website.
“This measure was adopted to prevent risks to financial stability by limiting ruble exchange-rate fluctuations,” the central bank said late yesterday.
The ruble’s 8.9 percent slide this year has been triggered in part by the upheaval in Ukraine that led to last month’s ouster of President Viktor Yanukovych, a Putin ally, and the incursion into Crimea, the home to Russia’s Black Sea fleet.
The U.S. is preparing $1 billion in loan guarantees for the interim government in Kiev, Secretary of State John Kerry said today, as Ukraine accused Russia of threatening to seize its war ships in Crimea. The U.S. is preparing sanctions in response to the military offensive, Jen Psaki, a State Department spokeswoman, said yesterday.
The Ukraine crisis initially erupted as anti-Yanukovych protests in November when he spurned a trade pact with the European Union in favor of closer ties with Russia. An interim cabinet is seeking aid from the IMF and new EU negotiations.
The central bank, led by Elvira Nabiullina, surprised investors yesterday by raising Russia’s key rate to 7 percent from 5.5 percent as part of its efforts to halt the ruble’s decline.
“The higher cost of shorting the ruble has helped to stabilize the spot market and reduced the pace of currency depreciation,” Morgan Stanley analysts James Lord and Meena Bassily said in an e-mailed note today.
The extra yield investors demand to hold Russia’s dollar-denominated bonds over U.S. Treasuries decreased 21 basis points to 267 basis points today, according to indexes compiled by JPMorgan Chase & Co.
Pressure on the ruble may be predominantly coming from retail clients, who are less sensitive to changes in interest rates, rather than institutional investors, according to Goldman Sachs’ research note.
The ruble advanced 1.1 percent to 42.1916 against Bank Rossii’s target basket of dollars and euros, following a 1.5 percent depreciation yesterday.
Russia’s currency policy shift aims to “tame risks” to overall financial stability from heightened ruble volatility, including concern that households and companies may switch deposits into foreign currency, ING’s Polevoy said.
“The measures could indeed help to somewhat stabilize the sentiment toward the ruble,” Polevoy wrote in the note. “With the built-up flexibility for setting parameters on a daily basis, the central bank clearly aims at not wasting reserves if the selling pressure sustains for a longer period.”