Sanctions Bite Banks on Dollar Costs: Russia Credit

Sanctions on Russian lenders are limiting their access to foreign financing and sending the cost of funding in dollars instead of rubles to a 16-month high.

The rate on a five-year cross-currency basis swap between the Russian and U.S. currencies reached negative 124 basis points on Aug. 21, the most since April 2013, according to data compiled by Bloomberg. A negative rate signals that traders are willing to pay a premium to obtain dollar cash flows for rubles.

Russian banks are seeking foreign currency to meet transaction needs of their clients after the U.S. and the European Union imposed sanctions on some state-controlled lenders last month as punishment for the government’s role in Ukraine. As Eurobond sales by Russian companies plummeted 70 percent since President Vladimir Putin’s incursion into Crimea in March, foreign banks also reduced their financing in dollars, according ING Groep NV’s Dmitry Polevoy.

“There’s shortage of dollars at Russian banks due to the sanctions,” Anton Nikitin, an analyst at VTB Capital in Moscow, said in e-mailed comments on Aug. 22. “Simultaneously, there is also low demand for rubles from foreign entities.”

Dollar Payments

The swaps allow traders to switch cash flows, paying rubles to receive dollars. They stood at minus 104.5 on July 30, the day before the EU announced sanctions banning the biggest Russian state-run banks, including OAO Sberbank and VTB Bank, from bond and share sales in the 28-country bloc. The U.S. limited funding access for lenders including OAO Gazprombank and Vnesheconombank earlier in July.

Similar swaps for the Malaysian ringgit were minus 71.5 and positive 84.5 for Mexico’s peso, the data show.

The ruble fell with government bonds on Aug. 22 as Russian trucks carrying humanitarian aid crossed the border into Ukraine, whose government said the move amounted to an invasion. The escalation may trigger more sanctions, Tim Ash, the chief economist at Standard Bank Group Ltd. in London, said that day. Russia’s currency weakened 0.2 percent to 36.1675 per dollar at 4:51 p.m. in London.

“Foreign banks stopped providing dollars in the amounts they have been offering before,” Polevoy, the chief economist for Russia and Commonwealth of Independent States at ING in Moscow, said by e-mail Aug. 22. “So if you need to lend in dollars, send a dollar payment or finance a foreign-currency transaction, and the choice you have is either not to send the payment, or to raise the dollars for payment at a higher price, the second argument wins.”

Ruble Liquidity

While access to funding in the U.S. currency has become more expensive, ruble deposit rates indicate liquidity is improving. The Ruble Overnight Index Average, or Ruonia, was 8.01 percent on Aug. 21, one basis point more than the central bank’s reference rate and compared with a July 28 peak of 8.96 percent.

Central bank repurchase operations, or cash injections for banks, have fallen to 2.58 trillion rubles ($71 billion), compared with a 2014 high of 2.96 trillion rubles in July, Bank of Russia data show.

Climbing ruble basis-swap costs may reflect expectations for further central bank interest-rate increases in response to accelerating price growth, Vladimir Evstifeev, an analyst at OAO Bank Zenit in Moscow, said by e-mail on Aug. 22. Annual inflation held above 7 percent in the four months through July, exceeding the central bank’s 5 percent target.

The ruble has slumped 9.2 percent against the dollar this year, the worst among 24 emerging markets tracked by Bloomberg after the Chilean and Argentine pesos. Faced with capital outflows fueled by the Ukraine crisis and concern that depreciation would stoke inflation, the central bank raised its benchmark rate by a total of 250 basis points since February.

“The market of long-term foreign exchange and interbank operations has virtually stopped because of sanctions,” Alexey Tretyakov, a money manager at Aricapital in Moscow, said by e-mail three days ago. “Foreign banks are now very reluctant to make long deals with Russian counterparties.”

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