Ruble Slides to Record as Russia Stocks Drop on New EU Sanctions

The ruble weakened to a record against the dollar and Russian stocks fell as European Union officials said new sanctions over Ukraine will come into force tomorrow and Brent crude slid for a sixth day.

The currency retreated as much 0.9 percent to 37.6205 per dollar, before trading 0.6 percent lower at 7 p.m. in Moscow. The Micex Index closed down 1.3 percent, the biggest loss since Aug. 29. OAO Sberbank, the nation’s biggest lender, led a 2.7 percent average drop in financial companies. Ten-year local-currency bonds retreated for a fourth day.

The EU’s plan to roll out more penalties against Russia is souring optimism that the cease-fire prevailing in eastern Ukraine will hold and pave the way for a recovery in the nation’s assets. Russia’s economy is set to “grind to a halt or worse” in the second half, Matteo Napolitano, director of sovereign group at Fitch Ratings, said in London today. Oil, which along with gas is the source of about half of government revenue, fell to the lowest intraday level since 2012.

“Western partners don’t seem to trust Russia and continue tightening the screws,” Andrey Verkholantsev, the head of research at Kapital Asset Management LLC in Moscow, said by phone. “The ruble’s decline is driven by the drop in oil prices, while sanctions exacerbate the negative newsflow surrounding Russian assets.”

Energy Companies

In addition to imposing the penalties, the 28-member EU will lay out its conditions for eventually suspending the measures, three EU officials said under condition of anonymity in Brussels. The sanctions will bar some Russian state-owned defense and energy companies from raising capital in the bloc, the officials said.

OAO Gazprom, Russia’s natural-gas export monopoly, fell 1.8 percent, the most in a month, after reporting a 41 percent slide in first-quarter profit. Shares of natural-gas company OAO Novatek, as well as oil producers OAO Rosneft and OAO Tatneft, fell at least 2 percent.

Russia’s annexation of Crimea and support for the eastern Ukraine rebellion led the EU to first cancel summit meetings with President Vladimir Putin, followed by asset freezes and travel bans on Russian politicians, military officers and businesspeople. The U.S. also announced sanctions on individuals and companies as recently as July, prompting Putin to retaliate last month with a food-import ban.

‘Still Negative’

“The decision was expected, but is still negative,” Dmitry Dorofeev, a money manager from BCS Financial Group in Moscow, said in e-mailed comments. “This may lead to counter-sanctions from the Russian side, as well as a new interest-rate hike.”

The trade surplus in Russia unexpectedly widened in July as exports rose and imports fell, a sign that a 13 percent depreciation in the ruble over the past year may be reining in Russians’ demand for overseas goods. The surplus climbed to $17.1 billion amid a 5.4 percent jump in sales abroad from a year earlier, while imports declined 4.2 percent, central bank data showed today. Analysts predicted a narrowing to $12 billion, according to a Bloomberg survey.

Sberbank, which was named under the EU’s last round of penalties in July, retreated 3 percent, the most since Aug. 28 on a closing basis. The lender’s shares are declining “on concern the central bank may raise rates tomorrow which will be negative for the banking sector,” Verkholantsev of Kapital said.

While 16 of 24 economists surveyed by Bloomberg expect the Bank of Russia will leave the one-week auction rate at 8 percent tomorrow, seven forecast an increase to 8.5 percent and one predicted a quarter-point tightening. Policy makers have raised borrowing costs by 250 basis points since Putin’s incursion into Crimea to stem the slide in the ruble.

Oil Slides

Brent slid 1 percent to $97.06 today as the International Energy Agency cut global oil demand forecasts for this year and next. The currency lost 0.8 percent against the euro today and weakened 0.7 percent against the central bank’s basket of dollars and euros. The yield on government bonds maturing in 2023 increased 14 basis points to 9.86 percent.

Russia, the world’s largest energy exporter, assumes an average price for its budget of $105 per barrel for Urals crude, which usually trades with a discount to Brent, and a ruble rate of 35.50 per dollar. To achieve the planned deficit of 0.4 percent of gross domestic product with the current oil price, the ruble must trade at about 37.50-38 per dollar, according to Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow.

“Based on these assumptions, the ruble still has some weakening potential from current levels,” he said in an e-mailed note.

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