Sanctions Threat Ravaging Ruble Stokes Rate Bets: Russia Credit

The ruble’s slide to records and derivatives showing more losses are in store are spurring wagers the Bank of Russia will raise interest rates again this year.

Forward-rate agreements for the local currency show traders expect central bank Chairman Elvira Nabiullina will decide on almost two quarter-point increases to the key rate by Dec. 1, according to data compiled by Bloomberg. That’s the highest showing since policy makers unexpectedly raised the one-week auction rate by 50 basis points to 8 percent on July 25 in response to the selloff in Russian assets triggered by tougher sanctions over the standoff in Ukraine.

The currency has breached all-time lows against the dollar in the past two days after the U.S. European Union threatened to broaden penalties, accusing President Vladimir Putin of steering a separatist surge in southeast Ukraine. Inflation, which surpassed the central bank’s 5 percent target in the four months through July, probably climbed to 7.6 percent in August, the median estimate in a Bloomberg survey of 16 analysts shows.

“What has happened since July signals the central bank is seriously considering whether to continue rate hikes,” Vladimir Pantyushin, chief strategist at Sberbank CIB in Moscow, said by phone yesterday. “Inflation accelerated and the ruble weakened. The situation has taken a turn for the worse.”

Trading Band

The currency tumbled as much as 1 percent to its latest trough of 37.51 per dollar yesterday, before trimming losses to 37.2505 as representatives from Russia, Ukraine, the Organization for Security and Cooperation in Europe and Ukrainian separatists met for talks on restoring peace.

Trading in ruble options indicates a 60 percent chance the currency will touch 40 per the dollar over the next six months, according to data compiled by Bloomberg.

Nabiullina’s decision to widen the ruble’s trading band on Aug. 18 raises the likelihood for more interest-rate increases, according to Roman Dzugaev, a fixed-income trader at BFA Bank OJSC in St. Petersburg. The Bank of Russia broadened the range within which the currency trades against its dollar-euro basket to 9 rubles from 7 rubles.

“Now that the central bank has virtually made the ruble freely floating, the interest rate is the only instrument for influencing it and curbing inflation,” Dzugaev said by e-mail yesterday. The ruble would need to weaken beyond its March 14 low of 43.0570 against the basket for policy makers to raise rates, he said. It was 42.6011 yesterday.

Sanctions Threat

The central bank, which holds its next policy meeting on Sept. 12, will keep its benchmark at 8 percent at least until Oct. 31, according to a Bloomberg survey of 38 economists.

Russia’s retaliatory food-import ban last month threatens to fuel food-price growth, which rose at an annual rate of 9.2 percent in July. Inflation will accelerate to 7.2 percent this year from 6.8 percent in 2013, according to the median estimate in a Bloomberg survey of analysts.

The situation in Ukraine deteriorated this week with Putin raising the prospect of “statehood” for parts of southeast Ukraine. Wider EU sanctions may extend restrictions to sovereign bonds, so far excluded in part because Russia invests in the debt of several of the bloc’s members, according to an explanatory paper obtained by Bloomberg in July.

Nabiullina, who has said she’s prepared to keep raising rates even as the economy teeters on recession, increased the key rate 250 basis since March. Three- by six-month forward-rate agreements traded 40 basis points above the three-month MosPrime rate, data showed yesterday.

The economy will shrink 0.2 percent in the third quarter, according to the median estimate in a survey of 38 analysts compiled by Bloomberg News. The yield on Russia’s 10-year local-currency bonds rose 143 basis points this quarter, including yesterday’s three basis-points climb to 9.83 percent.

“Expectations of a rate hike as early as in September are very real,” Evgeny Shilenkov, head of trading at Veles Capital in Moscow, said by e-mail yesterday.

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